# CA Intermediate

## CA Inter Advanced Accounting Study Material – Advanced Accounts CA Inter Study Material Notes Pdf

CA Inter Advanced Accounting Study Material PDF Download: Ace up your CA Intermediate Advanced Accounting exam preparation by taking help from various study resources like study materials, best books, model papers, important questions and answers, and many more. If you are worried about knowing where these exam resources can avail then don’t be. As we have come up with an effective guide called CA Inter Advanced Accounts Study Material pdf. Want to why is it important and what it covers? Dive in.

## Advanced Accounts CA Inter Study Material – CA Inter Advanced Accounting Study Material Notes Pdf

The Chartered Accountancy intermediate course has different papers in the curriculum and CA Inter Advanced accounting is one among all. To learn all the core topics covered under advanced accounts, you would definitely need liable and comprehensively explained notes. ICAI CA Inter study material pdf for advanced accounting provided on the official website of ICAI i.e., icai.org is the best solution.

CA Intermediate Advanced Accounts Study Material Notes Pdf links for all chapters are given here. Tap on the respective and needed link and view the important questions and answers from that particular subject or unit for learning. If you want this advanced accounting ca intermediate study material handwritten notes in pdf or printed form then download it on your device and take a printout so easily.

CA Intermediate Advanced Accounting Study Material Notes

### Advanced Accounting CA Inter Weightage

It’s very crucial and beneficial for students to get aware of the weightage for each and every chapter of ca inter advanced accounting paper. Due to the weightage details, candidates can plan their study timetable so easily and start their preparation accordingly. So, don’t miss to refer to the chapterwise weightage for CA Inter Advanced Accounts 2023 Exam.

Advanced Accounts CA Inter Chapter Wise Weightage

### CA Intermediate Advanced Accounting Syllabus

Understanding the complete Syllabus of CA Inter Paper 5 Advanced Accounting helps students to learn and solve complex problems related to accounts faster. Also, it is vital to make a study plan and focus on all the chapters covered in the paper. So, make sure to use the CA intermediate advanced accounting latest syllabus 2023 and practice well with our other exam resources like MCQs and model test papers.

CA Inter Advanced Accounting Accounts Syllabus

(One paper — Three hours — 100 Marks)

Objectives:
1. To acquire the ability to apply specific Accounting Standards and legislations to different transactions and events and in preparation and presentation of financial statements of business entities;
2. To understand and apply financial reporting and regulatory requirements of Banking Companies and NBFCs.

Contents:
1. Application of Accounting Standards:
AS 4: Contingencies and Events Occurring After the Balance Sheet Date
AS 5: Net Profit or Loss for the Period, Prior Period Items, and Changes in Accounting Policies
AS 7: Construction Contracts
AS 9: Revenue Recognition
AS 14: Accounting for Amalgamations
AS 17: Segment Reporting
AS 18: Related Party Disclosures
AS 19: Leases
AS 20: Earnings Per Share
AS 22: Accounting for Taxes on Income
AS 24: Discontinuing Operations
AS 26: Intangible Assets
AS 29: Provisions, Contingent Liabilities, and Contingent Assets.

2. Special Aspects of Company Accounts
(i) Accounting for employee stock option plan; (ii) Buy back of securities; (iii) Equity shares with differential rights.

3. Reorganization and liquidation of Companies
(i) Accounting for amalgamation (excluding inter-company holding) and reconstruction; (ii) Accounting involved in liquidation of companies.

4. Banking Companies and Non-Banking Financial Companies and regulatory requirements thereof.

5. Consolidated Financial Statements
Concept of consolidation and simple problems on Consolidated Financial Statements with single subsidiary (excluding problems involving acquisition of Interest in Subsidiary at Different Dates; Different Reporting Dates of Holding and Subsidiary; Disposal of a Subsidiary and Foreign Subsidiaries).

6. Dissolution of partnership firms including piecemeal distribution of assets; Amalgamation of partnership firms; Conversion of partnership firm into a company and Sale to a company; Issues related to accounting in Limited Liability Partnership.

Notes:
1. If either new Accounting Standards (ASS), Announcements and Limited Revisions to ASS are issued or the earlier ones are withdrawn or new ASS, Announcements and Limited Revisions to AS are issued in place of existing ASS, Announcements and Limited Revisions to AS, the syllabus will accordingly include / exclude such new developments in the place of the existing ones with effect from the date to be notified.
2. The specific exclusions, in any topic covered in the syllabus, will be effected, if any, by way of Study Guidelines.

#### CA Inter Study Material

The steps to be followed for downloading the study material of ca inter advanced accounting from the official portal of the Institute of Chartered Accountants of India (ICAI) are outlined below:

• Initially, enter the official website of the Institute of Chartered Accountants of India by clicking here: www.icai.org
• Navigate for the CA Intermediate Paper 5: Advanced Accounting page or else click on the available link: www.icai.org/post.html?post_id=13811
• Now, you will see the different exam resources for CA Inter Advanced Accounting like Study Material, Revision Test Papers, Suggested Answers, Mock Test Papers, Question Papers, and Referencer for Quick Revision.
• Click on the study material link and then tap on the Study Material applicable for May 2022 examination onwards link.
• Under this, you will find the chapters and sub-units of advanced accounting.

### FAQs on PDF formatted CA Intermediate Handwritten Notes for Advanced Accounting Paper 5

1. Is icai study material enough for ca intermediate advanced accounting?

Yes, ICAI Study material for ca intermediate advanced accounting paper 5 is sufficient to score great scores as it includes every core concept explanation in a simple manner along with practice questions and answers.

2. How to study accounting standards for ca inter 2023?

The following points will help CA intermediate course aspirants to study advanced accounting so confidently and easily:

• Start knowing the latest syllabus of the AA paper.
• Create a new study plan.
• Highlight the important points and also note down them separately. It works as a revision note.
• Concentrate on the chapter that has the highest weightage.

3. What is the Exam Pattern of CA Inter Paper 5?

The exam structure of CA Intermediate Paper 5 Advanced Accounting is a 30:70 assessment pattern means 30 marks for MCQ-based questions and 70 marks will be subjective questions.

### Key Takeaways

We think that the given stuff related to paper 5 of the CA inter-program ie., CA Inter Advanced Accounting Study Material PDF helped you all with your exam preparation. For more assistance and guidance at tough times do reach us by commenting below.

Our team will work on your query and update you soon with the best solution for CA courses. If you feel this CA Intermediate AA study notes pdf is worthy then share it with your CA friends and help them in their test preparation.

## Service costing – CA Inter Costing Study Material

Service costing – CA Inter Cost and Management Accounting Study Material is designed strictly as per the latest syllabus and exam pattern.

## Service costing – CA Inter Costing Study Material

Question 1.
What do you understand by Service costing? How are composite units computed? [CA Inter Nov 2009, Nov 2012, 4 Marks]
Service Costing:
Internal: The service costing is required for in-house services provided by a service cost centre to other responsibility centres as support services. Examples of support services are Canteen and hospital for staff, Boiler house for supplying steam to production departments, Captive Power generation unit, operation of fleet of vehicles for transport of raw material to factory or distribution of finished goods to the market outlets, IT department services used by other departments, research & development, quality assurance, laboratory etc.

External: When services are offered to outside customers as a profit centre in consonance with organisational objectives as an output like goods or passenger transport service provided by a transporter, hospitality services provided by a hotel, provision of services by financial institutions, insurance and IT companies etc.

In both the situation, all costs incurred are collected, accumulated for a certain period or volume, recorded in the cost accounting system and then expressed in terms of a cost unit of service.

Computation of composite units:
When two measurement units are combined together to know the cost of service or operation, it is called Composite units. Examples of Composite units are Ton- km., Quintal- km, Passenger-km., Patient-day etc.

Composite unit may be computed in two ways.

1. Absolute (Weighted Average) basis.
2. Commercial (Simple Average) basis.

In both bases of computation of service cost unit, weightage is also given to qualitative factors rather quantitative (which are directly related with variable cost elements) factors alone.

Question 2.
How Service costing is different from the Product costing. [CA Inter MTP]
Service costing differs from product costing (such as job or process costing) in the following ways due to some basic and peculiar nature.

• Unlike products, services are intangible and cannot be stored, hence, there is no inventory for the services.
• Use of Composite cost units for cost measurement and to express the volume of outputs.
• Unlike a product manufacturing, employee (labour) cost constitutes a major cost element than material cost.
• Indirect costs like administration overheads are generally have a significant proportion in total cost of a service as unlike manufacturing sector, service sector heavily depends on support services and traceability of costs to a service may not economically feasible.

Question 3.
State the unit of cost for the following industries:
(a) Transport
(b) Power
(c) Hotel
(d) Hospital [CA Inter Nov 2008, 2 Marks]

 Industry Unit of Cost (a) Transport Passenger – km. (in public transportation) Quintal – km., or Ton – km. (in goods carriage) (b) Power Kilowatt – hour (kWh) (c) Hotel Guest Days or Room Days (d) Hospital Patient per day, room per day or per bed, per operation etc.

Question 4.
Describe Composite Cost unit as used in Service Costing and discuss the ways of computing it. [CA Inter Nov 2019, 5 Marks]
Composite Cost Unit:
When two measurement units are combined together to know the cost of service or operation, it is called composite cost units. For example, a public transportation undertaking would measure the operating cost per passenger per kilometre.
Examples of Composite units are Ton- km., Quintal- km, Passenger-km., Patient-day etc.

Composite unit may be computed in two ways:
(i) Absolute (Weighted Average) basis: It is summation of the products of qualitative and quantitative factors. For example, to calculate absolute Ton-Km for a goods transport is calculated as follows:
Σ (Weight Carried × Distance)1 + (Weight Carried × Distance)2 + ………….. + (Weight Carried × Distance)n

(ii) Commercial (Simple Average) basis: It is the product of average qualitative and total quantitative factors. For example, in case of goods transport, Commercial Ton-Km is arrived at by multiplying total distance km., by average load quantity.
Σ (Distance1 + Distance2 + ………………… + Distancen) × (W1 + W2 + ……. + Wn/n)
In both bases of computation of service cost unit, weightage is also given to qualitative factors rather quantitative (which are directly related with variable cost elements) factors alone.

Question 5.
Distinguish between Absolute ton-kms and Commercial ton-kms. [CA Inter Nov 2006, 2 Marks]
Absolute tons-kms are the sum total of tons-kms arrived at by multiplying various distances by respective load quantities carried.
Commercial tons-kms are arrived at by multiplying total distance kms by average load quantity.

Question 6.
What do you understand by Build-Operate-Transfer (BOT) approach in Service Costing? How is the Toll rate computed? [CA Inter July 2021, 5 Marks]
Build-Operate-Transfer (BOT): BOT is an option for the government to outsource the public projects to private sectors. With BOT, the private sector designs, finances, constructs and operate the facility and eventually, after specified concession period, the ownership is transferred to government. Therefore, BOT can be seen as a developing technique for infrastructure projects by making them amenable to private sector participation.

Toll rate: Toll rate should have direct relation with the benefits that the road users would gain from its improvement. The benefits to road users are likely to be in terms of fuel savings, improvement in travel time and good riding quality.
No. of Vehicles User fee = Total distance × toll rate per km
Note: User fee will rounded off to nearest multiple of ₹ 5.

Costing of Transport Services

Question 1.
A Mineral is transported from two mines-‘A’ and ‘B’ and unloaded at plots at Railway Station. Mine A is at a distance of 10 kms. and B is at a distance of 15 kms. from railhead plots. A fleet of lorries of 5 tonne carrying capacity is used for the transport of mineral from the mines. Records reveal that the lorries average a speed of 30 kms. per hour, when running and regularly take 10 minutes to unload at the railhead. At mine ‘A’ loading time averages 30 minutes per load while at mine ‘B’ loading time averages 20 minutes per load. Drivers’ wages, depreciation, insurance and taxes are found to cost ₹ 9 per hour operated. Fuel, oil, tyres, repairs and maintenance cost ₹ 1.20 per km.
Draw up a statement, showing the cost per tonne-kilometer of carrying mineral from each mine. [CA Inter Nov. 2000, 8 Marks]
Statement showing cost per ton-km of carrying mineral from each time:

Working Notes:

Question 2.
A transport company has a fleet of three trucks of 10 tonnes, capacity each plying in different directions for transport of customers’ goods. The trucks run loaded with goods and return empty. The distance travelled, number of trips made and the load carried per day by each truck are as under:

The analysis of maintenance cost and the total distance travelled during the last two years is as under:

 Year Total distance travelled Maintenance Cost (₹) 1 1,60,200 46,050 2 1,56,700 45,175

The following are the details of expenses for the year under review:

 Diesel ₹ 10 per litre. Each litre gives 4 km per litre of diesel on an average. Driver’s salary ₹ 2,000 per month Licence and taxes ₹ 5,000 per annum per truck Insurance ₹ 5,000 per annum for all the three vehicles Purchase Price per truck ₹ 3,00,000, Life 10 years. Scrap value at the end of life is ₹ 10,000 Oil and sundries ₹ 25 per 100 km run. General Overhead ₹ 11,084 per annum

The vehicles operate 24 days per month on an average.
Required:
(i) Prepare an Annual Cost Statement covering the fleet of three vehicles.
(ii) Calculate the cost per km. run.
(iii) Determine the freight rate per tonne km. to yield a profit of 10% on freight. [CA Inter Nov 2001, 10 Marks]
(i) Annual Cost Statement of three vehicles:

 ₹ Diesel [(1,34,784 k.m. ÷ 4 km) × ₹ 10)] (Refer W.N.I) 3,36,960 Oil & sundries [(1,34,784 km. ÷ 100 km.) × ₹ 25] 33,696 Maintenance [(1,34,784 km. × ₹ 0.25) + ₹ 6,000] (Refer W.N.2) 39,696 Drivers’ salary [(₹ 2,000 × 12 months) × 3 trucks] 72,00 License and taxes (₹ 5,000 × 3 trucks) 15,000 Insurance 5,000 Deprecation [(₹ 2,90,000 ÷ 10 years) × 3 trucks] 87,000 General overhead 11,084 Total annual cost 6,00,436

(ii) Cost per km. run:
Cost per kilometer run = $$\frac{\text { Total annual cost of vehicles }}{\text { Total kilometers travelled annually}}$$ (Refer W.N.I)
= $$\frac{₹ 6,00,436}{1,34,784 \mathrm{kms}}$$ = ₹ 4.4548

(iii) Freight rate per tonne km (to yield a profit of 10% on freight)
Cost per tonner run = $$\frac{\text { Total annual cost of vehicles }}{\text { Total effective tonne kms p.a. }}$$ (Refer W.N.I)
= $$\frac{₹ 6,00,436}{5,25,312 \text { tonne } \mathrm{kms}}$$ = ₹ 1.143
Freight rate per tonne km. (₹ 1.143 ÷ 0.9) × 1 = ₹ 1.27

Working Notes:

1. Total kilometre travelled and tonnes kilometre (load carried) by three trucks in one year:

Total kilometre travelled by three trucks in one year
(468 km. × 24 days × 12 months) = 1,34,784 kms
Total effective tonnes kilometre of load carried by three trucks during one year
(1,824 tonnes km. × 24 days × 12 months) = 5,25,312 tonne kms

2. Fixed and variable component of maintenance cost:
Variable maintenance cost per km = $$\frac{\text { Difference in maintenance cost }}{\text { Difference in distance travelled }}$$
= $$\frac{₹ 46,050-₹ 45,175}{1,60,200 \mathrm{kms}-1,56,700 \mathrm{kms}}$$
= ₹ 0.25
Fixed maintenance cost
= Total maintenance cost-Variable maintenance cost
= ₹ 46,050 – (1,60,200 kms × ₹ 0.25)
= ₹ 6,000

Question 3.
Calculate total passenger kilometres from the following information:
Number of buses 6, number of days operating in a month 25, trips made by each bus per day 8, distance covered 20 kilometres (one side), capacity of bus 40 passengers, normally 80% of capacity utilization. [CA Inter Nov 2007, 2 Marks]
Calculation of passenger kilometer:
= 6 buses × 25 days × 8 trips × 2 sides × 20 k.m. × 40 passengers × 80%
= 15,36,000 passenger km

Question 4.
A transport company has been given a 40 kilometre long route to run 5 buses. The cost of each bus is ₹ 6,50,000. The buses will make 3 round trips per day carrying on average 80% passengers of their seating capacity. The seating capacity of each bus is 40 passengers. The buses will run on an average 25 days in a month. The other information for the year 2020-21 are given below:

 Garage rent ₹ 4,000 per month Annual repairs and maintenance ₹ 22,500 each bus Salaries of 5 drivers ₹ 3,000 each per month Wages of 5 conductors ₹ 1,200 each per month Manager’s salary ₹ 7,500 per month Road tax, permit fee, etc. ₹ 5,000 for a quarter Office expenses ₹ 2,000 per month Cost of diesel per litre ₹ 33 Kilometre run per litre for each bus 6 kilometres Annual depreciation 15% of cost Annual Insurance 3% of cost

You are required to calculate the bus fare to be charged from each passenger per kilometre, if the company wants to earn profits of 331/3 per cent on taking (total receipts from passengers). [CA Inter Nov. 2016, May 2010, 8 Marks]
Operating Cost Sheet for the year 2020-21

Working Notes:
1. Total Kilometres to be run during the year 2013-14
= 40 km. × 2 sides × 3 trips × 25 days × 12 months × 5 buses
= 3,60,000 Kilometres

2. Total passenger Kilometres
= 3,60,000 km. × 40 passengers × 80%
= 1,15,20,000 Passenger- km.

Question 5.
The following information relates to a bus operator:

 Cost of the bus ₹ 18,00,000 Insurance charges 3% p.a. Manager cum accountant’s salary ₹ 8,000 p.m. Annual Tax ₹ 50,000 Garage Rent ₹ 2,500 p.m. Annual repair & maintenance ₹ 1,50,000 Expected life of the bus 15 years Scrap value at the end of 15 years ₹ 1,20,000 Driver’s salary ₹ 15,000 p.m. Conductor’s salary ₹ 12,000 p.m. Stationary ₹ 500 p.m. Engine oil, lubricants (for 1200 km.) ₹ 2,500 Diesel and oil (for 10 km.) ₹ 52 Commission to driver and conductor (shared equally) 10% of collections Route distance 20 km long

The bus will make 3 round trips for carrying on the average 40 passengers in each trip. Assume 15% profit on collections. The bus will work on the average 25 days in a month.
Calculate fare for passenger-km [CA Inter Nov 2013, 8 Marks]
Total distance = 3 trips × 2 × 20 k.m. × 25 days = 3,000 k.m.
Total Passenger-km. = 3,000 km × 40 passengers = 1,20,000 Passenger-k.m.

Statement showing the Operating Cost per Passenger-km.

Working Notes:
Total costs before commission on collection and net profit is ₹ 90,350.
Now, the commission on collection to driver and conductor is 10% of collection and Profit is 15% of collection.
Therefore, total cost of ₹ 90,350 is 75% (i.e. 100% – 10% – 15%) of total collection.
So, total collection will be ₹ 1,20,466,67 (₹ 90,350 ÷ 75%).
Therefore, total commission on collection = 10% × ₹ 1,20,466.67 = ₹ 12,046.67
Driver’s share= 50% × ₹ 12,046.67 = 6,023.34
Conductor’s share = 50% × ₹ 12,046.67 = 6,023.33
Profit on collection = ₹ 1,20,466.67 × 15% = ₹ 18,070
Fare per Passenger-km. = $$\frac{\text { Total Collection }}{\text { Total Passenger }-\mathrm{km} .}$$
= $$\frac{₹ 1,20,466.67}{1,20,000}$$
= ₹ 1.004 (approx)

Question 6.
A mini-bus, having a capacity oi 32 passengers, Operates between two places – ‘A’ and ‘B\ The distance between the place ‘A’ and place ‘B’ is 30
km. The bus makes 10 round trips in a day for 25 days in a month. On an average, the occupancy ratio is 70% and is expected throughout the year.
The details of other expenses are

 ₹ Insurance 15,600 per annum Garage Rent 2,400 per quarter Road Tax 5,000 per annum Repairs 4,800 per quarter Salary of operating staff 7,200 per month Tyres and Tubes 3,600 per quarter Diesel: (one litre is consumed for every 5 km) 13 per litre Oil and Sundries 22 per 100 km run Depreciation 68,000 per annum

Passenger tax @ 22% on total taking is to be levied and bus operator requires a profit of 25% on total taking.
Prepare operating cost statement on the annual basis and find out the cost per passenger kilometer and one way fare per passenger [CA Inter May 2015, 8 Marks]
Operating Cost Statement

Calculation of Cost per passenger kilometre and one way fare per passenger:
Cost per Passenger-km. = $$\frac{\text { Total Operating Cost }}{\text { Total Passenger }-\mathrm{km} .}$$
= $$\frac{₹ 7,25,800}{40,32,000}$$
= 0.18
One way fare per Passenger = $$\frac{\text { Total Takings }}{\text { Total Passenger }-\mathrm{km} .}$$ × 30 km
= $$\frac{₹ 13,69,434}{40,32,000}$$ × 30 km
= ₹ 10.20

Working Notes:
1. Let total taking be X.
Total takings = Total operating cost + Passenger tax + Profit
So, X = ₹ 7,25,800 + 0.22 X + 0.25X
or, X – 0.47 X = ₹ 7,25,800
X = ₹ 13,69,434
Therefore, Passenger tax will be ₹ 3,01,275 (i.e. ₹ 13,69,434 × 0.22) and profit will be ₹ 3,42,359 (i.e. ₹ 13,69,434 × 0.25).

2. Total Kilometres to be run during the year
= 30 km. × 2 sides × 10 trips × 25 days × 12 months
= 1,80,000 Kilometres

3. Total passenger Kilometres
= 1,80,000 km. × 32 passengers × 70%
= 40,32,000 Passenger- km

Question 7.
M/s XY Travels has been given a 25 km. long route to run an air- conditioned Mini Bus. The cost of bus is ₹ 20,00,000. It has been insured @3% premium per annum while annual road tax amounts to ₹ 36,000. Annual repairs will be ₹ 50,000 and the bus is likely to last for 5 years. The driver’s salary will be ₹ 2,40,000 per annum and the conductor’s salary will be ₹ 1,80,000 per annum in addition to 10% of the takings as commission (to be shared by the driver and the conductor equally). Office and administration overheads will be ₹ 18,000 per annum. Diesel and oil will be ₹ 1,500 per 100 km. The bus will make 4 round trips carrying on an average 40 passengers on each trip.
Assuming 25% profit on takings and considering that the bus will run on an average 25 days in a month, you are required to:
(i) prepare operating cost sheet (for the month)
(it) Calculate fare to be charged per passenger km. [CA litter Nov. 20/8. 10 Marks]
Total distance – 4 trips × 2 × 25 k.m. × 25 days × 12 months = 60,000 k.m.
Total Passenger-km. = 60,000 kms × 40 passengers = 24,00,000 passenger-k.m.

(i) Statement showing the Operating Cost per Passenger-km.

(ii) Fare per passenger-k.m. = $$\frac{\text { Total Takings }}{\text { Total Passenger }-\mathrm{km} .}$$
= $$\frac{₹ 33,60,000}{24,00,000}$$
= ₹ 1.40

Working Notes:
Total costs before commission and profit is ₹ 21,84,000.
Now, the commission is 10% of takings and Profit is 25% of takings.
Therefore, the total cost of ₹ 21,84,000is 65% (i.e. 100% -10% – 25%) of total takings.
So, total takings will be ₹ 33,60,000 (₹ 21,84,000 ÷ 65%).
Therefore, total commission on takings = 10% × ₹ 33,60,000 = ₹ 3,36,000
Driver’s share= 50% × ₹ 3,36,000,= 1,68,000
Conductor’s share = 50% × ₹ 3,36,000 = 1,68,000
Profit on collection = ₹ 33,60,000 × 25% = ₹ 8,40,000
Passenger km = 60,000 × 40 passenger = 24,00,000.

Question 8.
X Ltd. distributes its goods to a regional dealer using single lorry. The dealer premises are 40 kms away by road. The capacity of the lorry is 10 tonnes. The lorry makes the journey twice a day fully loaded on the outward journey and empty on return journey. The following information is available:

 Diesel Consumption 8 km per litre Diesel Cost ₹ 60 per litre Engine Oil ₹ 200 per week Driver’s Wages (fixed) ₹ 2500 per week Repairs Garage Rent ₹ 600 per week Cost of Lorry (excluding cost of tyres) ₹ 800 per week Life of Lorry ₹ 9,50,000 Insurance ₹ 18,200 per annum Cost of Tyres ₹ 52,500 Life of Tyres 25,000 kms Estimated sale value of the lorry at the end of its life is ₹ 1,50,000 Vehicle License Cost ₹ 7,800 per annum Other Overhead Cost ₹ 41,600 per annum

The lorry operates on a 5 day week.
Required:
(i) A statement to show the total cost of operating the vehicle for the four week period analysed into Running cost and Fixed cost.
(ii) Calculate the vehicle operating cost per km and per tonne km. (Assume 52 weeks in a year) [CA Inter May 2019, 10 Marks]
Total distance = 2 trips × 2 × 40 k.m. × 5 days ×4 weeks = 3,200 k.m.
Total tonne-km. = 2 trips × 40 k.m. × 5 days × 4 weeks × 10 tonnes = 16,000 tonne-kms
Note: The lorry was fully loaded only on outward journey and it is empty on return journey.

(i) Statement showing Operating Cost of vehicle for the 4 week period

(ii) Calculation of vehicle operating cost:
Operating cost per km = $$\frac{\text { Total Cost }}{\text { Total Kilometers }}$$
= $$\frac{₹ 68,320}{3,200}$$ = ₹ 21.35

Operating cost per Tonne-km = $$\frac{\text { Total Cost }}{\text { Total Tonne-kms }}$$
= $$\frac{₹ 68,320}{16,00}$$ = ₹ 21.35

Question 9.
SEZ Ltd. built a 120 km. long highway and now operates a toll road to collect tolls. The company has invested ? 900 crore to build the road and has estimated that a total of 120 crore vehicles will be using the highway during the 10 years toll collection tenure. The other costs for the month of “June 2020” are as follows:
(i) Salary:

• Collection personnel (3 shifts and 5 persons per shift) ₹ 200 per day per person.
• Supervisor (3 shifts and 2 persons per shift) – ₹ 350 per day per person.
• Security personnel (2 shifts and 2 persons per shift) – ₹ 200 per day per person
• Toil Booth Manage; (3 shifts anti 1 person per shift) – ₹ 500 per day per person,

(ii) Electricity – ₹ 1,50,000
(iii) Telephone – ₹ 1,00,000
(iv) Maintenance cost – ₹ 50 lakhs
(v) The company needs 30% profit over total cost.
Required:
(1) Calculate cost per kilometre.
(2) Calculate the toll rate per vehicle. [CA Inter Nov 2G20, 10 Marks]
Statement of Cost for the month June, 2020

1. Calculation of cost per kilometer:
= $$\frac{\text { Total Cost }}{\text { Total } \mathrm{Km}}$$ = $$\frac{₹ 8,04,72,000}{120 \mathrm{kms}}$$ = ₹ 6,70,600

2. Calculation of toll rate per vehicle:
= $$\frac{\text { Total Cost }+25 \% \text { profit }}{\text { Vehicles per month }}$$ = $$\frac{₹ 8,04,72,000+₹ 2,41,41,600}{1,00,00,000 \text { vehicles }}$$ = ₹ 10.46

Working:
Vehicles per month = $$\frac{\text { Total estimated vehicles }}{10 \text { years }}$$ ÷ 12 months
= $$\frac{120 \text { crores }}{10 \text { years }}$$ ÷ 12 months = 1 crore vehicles

Question 10.
EPS is a Public School having 25 buses each plying in different directions for the transport of its school students. In view of large number of students availing of the bus service, the buses work two shifts daily both in the morning and in the afternoon. The buses are garaged in the school. The workload of the students has been so arranged that in the morning, the first trip picks up senior students and the second trip plying an hour later picks up junior students. Similarly, in the afternoon, the first trip takes the junior students and an hour later the second trip takes the senior students home.

The distance travelled by each bus, one way is 16 km. The school works 24 days in a month and remains closed for vacation in May and June. The bus fee, however, is payable by the students for all the 12 months in a year.
The details of expenses for the year 2020-21 are as under:

 Driver’s salary payable for all the 12 in months. ₹ 5,000 per month per driver. Cleaner’s salary payable for all the 12 months (one cleaner has been employed for every five buses). ₹ 3,000 per month per cleaner Licence Fees, Taxes etc. ₹ 2,300 per bus per annum Insurance Premium ₹ 15,600 per bus per annum Repairs and Maintenance ₹ 16,400 per bus per annum Purchase price of the bus ₹ 16,50,000 each Life of the bus 16 each Scrap value ₹ 1,50,000 Diesel Cost ₹ 18.50 per litre

Each bus gives an average of 10 km. per litre of diesel. The seating capacity of each bus is 60 students. The seating capacity is fully occupied during the whole year. The school follows differential bus fees based on distance travelled as under:
Students picked up and dropped within the range of distance from the school-Bus fee-Percentage of students availing this facility

 4 km 25% of Full 15% 8 km 50% of Full 30% 16 km Full 55%

Ignore interest. Since the bus fees has to be based on average cost, you are required to
(i) Prepare a statement showing the expenses of operating a single bus and the fleet of 25 buses for a year.
(ii) Work out average cost per student per month in respect of:
(a) Students coming from a distance of upto 4 km. from the school.
(b) Students coming from a distance of upto 8 km. from the school; and
(c) Students coming from a distance of upto 16 km. from the school. [CA Inter May 2004, 10 Marks]
(i) Statement of EPS Public School showing the expenses of operating a single bus and the fleet of 25 buses for a year

(ii) Average cost per student per month in respect of students coming from a distance of:

 (a) 4 km. from the school [₹ 2,52,082/(354 students × 12 months)] (Refer W.N.2) ₹ 59.34 (b) 8 km. from the school (₹ 59.34 × 2) ₹ 118.68 (c) 16 km. from the school (₹ 59.34 × 4) ₹ 237.36

Working Notes:
1. Calculation of diesel cost per bus:

 No. of trips made by a bus each day 4 Distance travelled in one trip both ways (16 km. × 2 trips) 32 km. Distance travelled per day by a bus (32 km. × 4 shifts) 128 km. Distance travelled during a month (128 km. × 24 days) 3,072 km. Distance travelled per year (3,072 km. × 10 months) 30,720 km. No. of litres of diesel required per bus per year (30,720 km. ÷ 10 km.) 3,072 litres Cost of diesel per bus per year (3,072 litres × ₹ 18.50) ₹ 56,832

2. Calculation of number of students per bus:

 Bus capacity of 2 trips (60 students × 2 trips) 120 students 1/4th fare students (15% × 120 students) 18 students ½ fare 30% students (equivalent to 1/4th fare students) 72 students Full fare 5596 students (equivalent to 1/4th fare students) 264 students Total 1/4th fare students 354 students

Question 11.
Paras Travels provides mini buses to an IT company for carrying its employees from home to office and dropping back after office hours. It runs a fleet of 8 mini buses for this purpose. The buses are parked in a garage adjoining the company’s premises. Company is operating in two shifts (one shift in the morning and one shift in the afternoon). The distance travelled by each mini bus one way is 30 kms. The company works for 20 days in a month. The seating capacity of each mini bus is 30 persons. The seating capacity is normally 80% occupied during the year. The details of expenses incurred for a year are as under:

 Driver’s salary ₹  20,000 per driver p.m. Lady attendant’s salary (mandatorily required for each mini bus) ₹ 10,000 per attendant p.m. Cleaner’s salary (One cleaner for 2 mini buses) ₹ 15,000 per cleaner p.m. Diesel (Avg. 8 kms per litre) ₹ 80 per litre Insurance charges (per annum) 2% of Purchase Price License fees and taxes ₹ 5,080 per mini bus p.m. Garage rent paid ₹ 24,000 p.m. Repair & maintenance including engine oil and lubricants (for every 5,760 kms) ₹ 2,856 per mini bus Purchase Price of mini bus ₹ 15,00,000 each Residual life of mini bus 8 Years Scrap value per mini bus at the end of residual life ₹ 3,00,000

Paras Travels charges two types of fare from the employees. Employees coming from a distance of beyond 15 kms away from the office are charged double the fare which is charged from employees coming from a distance of upto 15 kms. away from the office. 50% of employees travelling in each trip are coming from a distance beyond 15 kms. from the office. The charges are to be based on average cost.
You are required to:
(i) Prepare a statement showing expenses of operating a single mini bus for a year.
(ii) Calculate the average cost per employee per month in respect of:
(a) Employees coming from a distance upto 15 kins, from the office.
(b) Employees coming from a distance beyond 15 kms. from the office. [CA Inter Dec. 2021, 10 Marks]
(i) Statement showing operating cost for a single Mini-Bus per year

Notes:
1. Total Distance Travelled = 4 trip × 2 shifts × 30 km. × 20 days × 12 months
= 57,600 kms.
2. Garage rent paid i.e. ₹ 24,000 are assumed to be paid for all 8 buses.

(ii) Average cost per employee per month in respect of employees coming from a distance:

 (a) upto 15 kms. from the office [₹ 1,10,960/72 employees] ₹ 1,541.11 (b) beyond 15 kms. from the office [₹ 1,541.11 × 2] ₹ 3,082.22

Working Note: Calculation of equivalent number of employees:

 Seating capacity of 2 shifts (morning + afternoon) [30 employees × 2 shifts] 60 employees Occupancy (80%) 48 employees Half fare employees (50%) 24 employees Full fare employees (50% but equivalent to half fare employees) [48 employees × 50% × 2) 48 employees Total half fare employees 72 employees

Question 12.
A transport company has 20 vehicles, the capacities are as follows:

 No. of Vehicles Capacity per vehicle 5 9 MT 6 12 MT 7 15 MT 2 20 MT

The company provides the goods transport service between stations ‘A’ to station ‘B’ Distance between these stations is 100 kilometers. Each vehicle makes one round trip per day on an average. Vehicles are loaded with an average of 90% of capacity at the time of departure from station ‘A’ to station ‘B’ and at the time of return back loaded with 70% of capacity. 10% of vehicles are laid up for repairs every day. The following information is related to the month of August, 2020:

 Salary of Transport Manager ₹ 60,000 Salary of 30 drivers ₹ 20,000 each driver Wages of 25 Helpers ₹ 12,000 each helper Loading and unloading charges ₹ 850 each trip Consumable stores (depends on running of vehicles) ₹ 1,35,000 Insurance (Annual) ₹ 8,40,000 Road Licence (Annual) ₹ 6,00,000 Cost of Diesel per litre ₹ 78 Kilometres run per litre each vehicle 5 Km. Lubricant, Oil etc. ₹ 1,15,000 Cost of replacement of Tyres, Tubes, other parts etc. (on running basis) ₹ 4,25,000 Garage rent (Annual) ₹ 9,00,000 Routine mechanical services ₹ 3,00,000 Electricity charges (for office, garage and washing station) ₹ 55,000 Depreciation of vehicles (on time basis) ₹ 6,00,000

There is a workshop attached to transport department which repairs these vehicles and other vehicles also. 40 per cent of transport manager’s salary is debited to the workshop. The transport department has been apportioned ₹ 88,000 by the workshop during the month. During the month operation was for 23 days.
You are required:
(i) Calculate per ton-km operating cost
(ii) Determine the freight to be charged per ton-km, if the company earned a profit of 25 per cent on freight. [CA lute, Nov. 2020. RTP]
(i) Operating Cost Sheet for the month of August, 2020

 ₹ A. Fixed Charges: Manager’s salary (₹ 60,000 × 6096) 36,000 Drivers’ Salary (₹ 20,000 ₹ 30 drivers) 6,00,000 Helpers’ wages (₹ 12,000 ₹ 25 helpers) 3,00,000 Insurance (₹ 8,40,000 4 ÷ 12 months) 70,000 Road licence (₹ 6,00,000 ÷ 12 months) 50,000 Garage rent (₹ 9,00,000 ÷ 12 months) 75,000 Routine mechanical services 3,00,000 Electricity charges (for office, garage and washing station) 55,000 Depreciation of vehicles 6,00,000 Apportioned workshop expenses 88,000 Total (A) 21,74,000 B. Variable Charges: Loading and unloading charges (Working Note 1) 7,65,000 Consumable Stores 1,35,000 Cost of diesel (Working Note 2) 14,04,000 Lubricant, Oil etc. 1,15,000 Replacement of Tyres, Tubes & other parts 4,25,000 Total (B) 28,44,000 C. Total Cost (A + B) 50,18,000 D. Total Ton-Kms. (Working Note 3) 9,43,200 E. Cost per ton-km. (C ÷ D) 5.32

(ii) Calculation of Chargeable Freight

 Cost per ton km. ₹ 5.32 Add: Profit @ 25% on freight or 33% on ₹ 1.77 Chargeable freight per ton-km. ₹ 7.09

Working Notes:
= Numbers of vehicles available per day × No. of days × trips × wages per trip
= (20 vehicles × 90%) × 25 days × 2 trips × ₹ 850
= 18 × 25 × 2 × 850
= ₹ 7,65,000

2. Cost of Diesel:
Distance covered by each vehicle during August, 2020
= 100 k.m. × 2 × 25 days × 90% = 4,500 km.
Consumption of diesel = $$\frac{4,500 \mathrm{~km} \times 20 \text { vehicles }}{5 \mathrm{~km}}$$ = 18,000 litres
Cost of diesel = 18,000 litres × ₹ 78 = ₹ 14,04,000.

3. Calculation of total ton-km:
Total Ton-Km. = Total Capacity × ₹ Distance covered by each vehicle × Average Capacity Utilisation ratio.
= [(5 × 9 MT) + (6 × 12 MT) + (7 × 15 MT) + (2 × 20 MT)] × 4,500 km × $$\left(\frac{70 \%+90 \%}{2}\right)$$
= (45 + 72 + 105 + 40) × 4,500 km × 80%
= 262 × 4,500 × 80%
= 9,43,200 ton-km

Question 13.
A lorry starts with a load of 24 tonnes of goods from station A. It unloads 10 tonnes at station B and rest of goods at station C. It reaches back directly to station A after getting reloaded with 18 tonnes of goods at station C. The distance between A to B, B to C and then from C to A are 270 kms, 150 kms and 325 kms respectively. Compute ‘Absolute tonnes kms’ and ‘Commercial tonnes-kms’. [CA Inter June, 2009, 2 Marks]
Absolute tonnes kms:
= tonnes × km
= 24 tonnes × 270 kms + 14 tonnes × 150 kms
= 14,430 tonnes kms
Commercial tonnes kms:
= Average load × total kms travelled
= $$\left[\frac{24+14+18}{3}\right]$$ tonnes × 745 kms
= 13,906.67 tonnes km

Question 14.
Harry Transport Service is a Delhi based national goods transport service provider, owning five trucks for this purpose. The cost of running and maintaining these trucks are as follows:

 Diesel cost ₹15 per km. Engine oil ₹ 4,200 for every 14,000 km. Repair and maintenance ₹ 12,000 for every 10,000 km. Driver’s salary ₹ 20,000 per truck per month Cleaner’s salary ₹ 7,000 per truck per month Supervision and other general expenses ₹ 15,000 per month Cost of loading of goods ₹ 200 per Metric Ton (MT)

Each truck was purchased for Rs. 20 lakhs with an estimated life of 7,20,000 km. During the next month, it is expecting 6 bookings, the details of which are as follows:

Required:
(i) Calculate the total absolute Ton-km for the next month.
(ii) Calculate the cost per ton-km. [CA Inter MTP]
(i) Calculate the total absolute Ton-km for the next month.

Total absolute Ton-km = 1,89,115 ton-km

(ii) Calculation of cost per ton-km:

Question 15.
GTC has a lorry of 6-ton carrying capacity. It operates lorry service from city A to city B for a particular vendor. It charges ₹ 2,400 per ton from city ‘A’ to city ‘B’ and ₹ 2,200 per ton for the return journey from city ‘B’ to city ‘A’. Goods are also delivered to an intermediate city *C’ but no extra charges are billed for unloading goods in-between destination city and no concession in rates is given for reduced load after unloading at intermediate city. Distance between the city ‘A’ to ‘B* is 300 km and distance from city ‘A’ to ‘C’ is 140 km.
In the month of January, the truck made 12 journeys between city ‘A’ and city ‘B’. The details of journeys are as follows:

 Outward journey No. of journeys Load (in ton) ‘A’ to ‘B’ ‘X to C’ C’ to ‘B’ 10 2 2 6 6 4 Return journey No. of journeys Load (in ton) B’ to ‘A’ ‘B’ to ‘A’ ‘B’ to ‘C’ ‘C’ to ‘A’ 5 6 1 1 8 6 6 0

Annual fixed costs and maintenance charges are ₹ 6,00,000 and ₹ 1,20,900 respectively. Running charges spent during the month of January are ₹ 2,94,400 (includes ₹ 12,400 paid as penalty for overloading).
You are required to:
(i) Calculate the cost as per
(a) Commercial ton-kilometre,
(b) Absolute ton-kilometre
(ii) Calculate Net Profit/ loss for the month of January. [ICAIModule]
(i) Calculation of Total Monthly cost for running truck:

(a) Cost per commercial ton-km. = $$\frac{₹ 3,42,000}{44,856 \text { ton-km }}$$ = ₹ 7.62
(Refer W.N.1)
(b) Cost per absolute ton-km. = $$\frac{₹ 3,42,000}{44,720 \text { ton-km }}$$ = ₹ 7.65
(Refer W.N.2)

(ii) Calculation of Net Profit/Loss for the month of January:

Working Notes:
1. Calculation of Commercial Ton-km:

2. Calculation of Absolute Ton-km:

Question 16.
In order to develop tourism, ABCL airline has been given permit to operate three flights in a week between X and Y cities (both side). The airline operates a single aircraft of 160 seats capacity. The normal occupancy is estimated at 60% throughout the year of 52 weeks. The one-way fare is ₹ 7,200. The cost of operation of flights are:

 Fuel cost (variable) ₹ 96,000 per flight Food served on board on non- chargeable basis ₹ 125 per passenger Commission 5% of fare applicable for all booking Fixed cost: Aircraft lease ₹ 3,50,000 per flight Landing Charges ₹ 72,000 per flight

Required:
(i) Calculate the net operating income per flight.
(ii) The airline expects that its occupancy will increase to 108 passengers per flight if the fare is reduced to ₹ 6,720.
Advise whether this proposal should be implemented or not. [CA Inter May 2005, 5 Marks]
(i) No. of passengers 160 seats × 60% = 96 passengers

Calculation of Net operating income flight:

(ii) If the fare is reduced to ₹ 6,750 per passenger

There is an increase in contribution by ₹ 31,332. Hence the proposal is acceptable.

Question 17.
Navya LMV Pvt. Ltd, operates cab/car rental service in Delhi NCR. It provides its service to the offices of Noida, Gurugram and Faridabad. At present it operates CNG fuelled cars but it is also considering to upgrade these into Electric Vehicle (EV). The details related with the owning of CNG & EV propelled cars are as tabulated below:

 CNG Car EV Car Car purchase price (₹) 9,20,000 15,20,000 Govt. subsidy on purchase of car (₹) – 1,50,000 Life of the car 15 years 10 years Residual value (₹) 95,000 1,70,000 Mileage 20 km/kg 240 km per charge Electricity consumption per full charge – 30Kwh CNG cost per Kg () 60 – Power cost per Kwh (₹) – 7.60 Annual Maintenance cost (₹) 8,000 5,200 Annual insurance cost (₹) 7,600 14,600 Tyre replacement cost in every 5 year (₹) 16,000 16,000 Battery replacement cost in every 18 year (₹) 12.000 5,40,000

Apart from the above, the following are the additional information:

 Average distance covered by a car in a month 1,500 km Driver’s salary (₹ ) 20,000 p.m Garage rent per car (₹ ) 4,500 p.m Share of Office & Administration cost per car (₹ ) 1,500 p.m

Required:
Calculate the operating cost of vehicle per month per car for both CNG & EV options. [CA Inter RTP May 2022]
Calculation of Operating cost per month

Working Notes:
1. Calculation of Depreciation per month:

 CNG Car EV Car A Car purchase price ₹ 9,20,000 ₹ 15,20,000 B Less: Govt, subsidy – (₹ 1,50,000) C Less: Residual value (₹ 95,000) (1,70,000) D Depreciable value of car [A-B-C] ₹ 8,25,000 ₹ 12,00,000 E Life of the car 15 years 10 years F Annual depreciation [D ÷ E] ₹ 55,000 ₹ 1,20,000 G Depreciation per month [F ÷ 12] ₹ 4,583.33 ₹ 10,000

2. Fuel/ Electricity consumption cost per month:

 CNG Car EV Car A Average distance covered in month 1,500 Km 1,500 Km B Mileage 20 Km 240 Km C Qty. of CNG/ Full charge required [A ÷ B] 75 kg. 6.25 D Electricity Consumption [C × 30 kwh] – 18.75 E Cost of CNG per kg ₹ 60 – F Power cost per Kwh – ₹ 7.60 G CNG Cost per month [C × E] ₹ 4,500 – H Power cost per month [D × F] – ₹ 1,425

3. Amortised cost of Tyre replacement:

 CNG Car EV Car A Life of vehicle 15 years 10 years B Replacement interval 5 years 5 years C No. of time replacement required 2 times 1 time D Cost of tyres for each replacement ₹ 16,000 ₹ 16,000 E Total replacement cost [C × D] ₹ 32,000 ₹ 16,000 F Amortised cost per year [E ÷ A] ₹ 2,133.33 ₹ 1,600 G Cost per month [F ÷ 12] ₹ 177.78 ₹ 133.33

4. Amortised cost of Battery replacement:

 CNG Car EV Car A Life of vehicle 15 years 10 years B Replacement interval 8 years 8 years C No. of time replacement required 1 time 1 time D Cost of battery for each replacement ₹ 12,000 ₹ 5,40,000 E Total replacement cost [C × D] ₹ 12,000 ₹ 5,40,000 F Amortised cost per year [E ÷ A] ₹ 800 ₹ 54,000 G Cost per month [F ÷ 12] ₹ 66.67 ₹ 4,500

Question 18.
A hotel is being run in a Hill station with 200 single rooms. The hotel offers concessional rates during six off-season months in a year.
During this period, half of the full room rent is charged. The management’s profit margin is targeted at 20% of the room rent. The following are the cost estimates and other details for the year ending on 31st March, 2021:
(i) Occupancy during the season is 80% while in the off-season it is 40%.
(ii) Total investment in the hotel is ₹ 300 lakhs of which 80% relates to Buildings and the balance to Furniture and other Equipment.
(iii) Room attendants are paid ₹ 15 per room per day on the basis of occupancy of rooms in a month.
(iv) Expenses:

• Staff salary (excluding that of room attendants) ₹ 8,00,000
• Repairs to Buildings ₹ 3,00,000
• Laundry Charges ₹ 1,40,000
• Interior Charges ₹ 2,50,000
• Miscellaneous Expenses ₹ 2,00,200

(v) Annual Depreciation is to be provided on Buildings @ 5% and 15% on Furniture and other Equipments on straight line method.
(vi) Monthly lighting charges are ₹ 110, except in four months in winter when it is ₹ 30 per room and this cost is on the basis of full occupancy for a month.
You are required to workout the room rent chargeable per day both during the season and the off-season months using the foregoing information (Assume a month to be of 30 days and winter season to be considered as part of off-season). [CA Inter Nov 2019, 10 Marks]
Statement of total cost

 ₹ Staff salary 8,00,000 Repairs to building 3,00,000 Laundry 1,40,000 Interior 2,50,000 Miscellaneous Expenses 2,00,200 Depreciation on Building (₹ 300 Lakhs × 80% × 5%) 12,00,000 Depreciation on Furniture & Equipment (₹ 300 Lakhs × 20% × 15%) 9,00,000 Room attendant’s wages/₹ 15 per Room Day × 43,200 Room Days) 6,48,000 Lighting charges 1,32,800 Total cost Add: Profit Margin (20% on Room rent or 25% on Cost) 45,71,000 11,42,750 Total Rent to be charged 57,13,750

Calculation of Room Rent per day:
Total Rent/Equivalent Full Room days = ₹ 57,13,750/36,000 = ₹ 158.72
Room Rent during Season – ₹ 158.72
Room Rent during Off season = ₹ 158.72 × 50% = ₹ 79.36

Working Notes:
(i) Total Room days in a year

(ii) Lighting Charges:
It is given that lighting charges is ₹ 110 per month. However, during winter season of four months, it is ₹ 30 per month.
It is also given that peak season is 6 months and off season is 6 months.
Since, a hotel being in a Hill station, winter season will be considered as off season. Hence, the non-winter season of 8 months includes Peak season of 6 months and Off season of 2 months.
Accordingly, the lighting charges are calculated as follows:

 Season Occupancy (Room-days) Season & Non-winter – 80% Occupancy 200 Rooms × 80% × b months × ₹ 110 per month = ₹ 1,05,600 Off- season & Non-winter – 40% Occupancy (8 – 6 months) 200 Rooms × 40% × 2 months × ₹110 per month = ₹ 17,600 Off- season & -winter – 40% Occupancy months) 200 Rooms × 40% × 4 months × ₹ 30 per month = ₹ 9,600 Total Lighting charges ₹ 1,05,600+ ₹ 17,600 + ₹ 9,600 = ₹ 1,32,800

Question 19.
Following are the information given by owner of M/s Moonlight Co. running a hotel at Manali. You are requested to advise him regarding the rent to be charged from his customer per day so that he is able to earn 20% profit on cost other than interest.
(i) Staff salaries ₹ 4,00,000.
(ii) The Room Attendant’s salary is ₹ 10 per day. The salary is paid on daily basis and the services of room attendant are needed only when the room is occupied. There is one room attendant for one room.
(iii) Lighting, Heating and Power:
(a) The normal lighting expenses for a room if it is occupied for the whole month is ₹ 250.
(b) Power is used only in winter and normal charge per month if occupied for a room is ₹ 100.
(iv) Repairs to Building ₹ 50,000 per annum.
(v) Linen etc. ₹ 24,000 per annum.
(vi) Sundries ₹ 70,770 per annum.
(vii) Interior decoration and furnishing ₹ 50,000 per annum.
(viii) Cost of Building ₹ 20,00,000, rate of depreciation 5%.
(ix) Other Equipment ₹ 5,00,000, rate of depreciation 10%.
(x) Interest @ 5% may be charged on its investment of ₹ 25,00,000 in the building and equipment.
(xi) There are 200 rooms in the hotel and 90% of the rooms are normally occupied in summer and 40% of the rooms are occupied in winter. You may assume that period of summer and winter is six months each. Normal days in a month may be assumed to be 30. [CA Inter May 2019, 8 Marks]
Statement of Total cost:

 (₹) Staff salary 4,00,000 Room attendants’ salary (₹ 10 × 46,800 room-days) 4,68,000 Lighting e×penses (₹ 250 × 1,560 room-months) 3,90,000 Power e×penses (₹ 100 × 480 room-months) 48,000 Repairs to building 50,000 Linen 24,000 Sundries Expenses 70,770 Interior decoration and furnishing 50,000 Depreciation on Building (₹ 20 Lakhs × 5%) 1,00,000 Depreciation on other Equipment (₹ 5 Lakhs × 10%) 50,000 Total cost excluding interest 16,50,770 Add: Profit Margin (20% on cost excluding interest) 3,30,154 Add: Interest on investments (₹ 25 Lakhs × 5%) 1,25,000 Total Rent to be charged 21,05,924

Calculation of Room Rent per day:
Total Cost / Equivalent Room days = ₹ 21,05,924 ÷ 46,800 = ₹ 44.99 or ₹ 45
Note: It is assumed that staff salary of ₹ 4,00,000 is per annum.
Working Note: Calculation of Total Room days in a year
Summer (90% occupancy) = 200 Rooms × 90% × 6 months × 30 days
= 32,400 Room Days
Winter (40% Occupancy) =200 Rooms × 40% × 6 months × 30 days
= 14,400 Room Days
Total Room Days = 32,400 + 14,400 = 46,800

Question 20.
A group of ‘Health Care Services’ has decided to establish a Critical Care Unit in a metro city with an investment of f 85 lakhs in hospital equipments. The unit’s capacity shall be of 50 beds and 10 more beds, if required, can be added.
Other information for a year are as under:

 ₹ Building Rent 2,25,000 per month Manager Salary (Number of Manager-03) 50,000 per month to each one Nurses Salary (Number of Nurses-24) 18,000 per month to each Nurse Ward boy’s Salary (Number of ward boys-24) 9,000 per month per person Doctor’s payment (Paid on the basis of number of patients attended and time spent by them) 5,50,000 per month Food and laundry services (variable) 39,53,000 Medicines to patients (variable) 22,75,000 per year Administrative Overhead 28,00,000 per year Depreciation on equipments 15% per annum on original cost

It was reported that for 200 days in a year 50 beds were occupied, for 105 days 30 beds were occupied and for 60 days 20 beds were occupied.
The hospital hired 250 beds at a charge of ₹ 950 per bed to accommodate the flow of patients. However, this never exceeded the normal capacity of 50 beds on any day.
Find out:
(i) Profit per patient day, if hospital charges on an average ₹ 2,500 per day from each patient.
(ii) Break even point per patient day (Make calculation on annual basis) [CA Inter May 2018, 10 Marks]
Number of Patient Days
200 days× 50 beds = 10,000
105 days × 30 beds = 3,150
60 days × 20 beds = 1,200
Extra Bed = 250
Total ⇒ 10,000 + 3,150 + 1,200 + 250 = 14,600

Statement of Profitability

 Elements of Cost and Revenue ₹ Revenue (14,600 patient days × ₹ 2,500 per day) 3,65,00,000 Variable Costs Food and Laundry Service 39,53,000 Medicines to Patients 22,75,000 Doctor’s Payment (₹ 5,50,000 × 12 months) 66,00,000 Hire Charges of Bed (250 × ₹ 950) 2,37,500 Total Variable Costs 1,30,65,500 Contribution (Revenue-Variable Costs) 2,34,34,500 Fixed Costs Building Rent 27,00,000 Manager’s Salary (₹ 50,000 × 3 × 12) 18,00,000 Nurse’s Salary (₹ 18,000 × 12 × 24) 51,84,000 Ward boy’s Salary (₹ 9,000 × 12 × 24) 25,92,000 Administrative Overheads 28,00,000 Depreciation on Equipment’s 12,75.000 Total Fixed Costs 1,63,51,000 Profit (Contribution Total Fixed Costs) 70,83,500

Profit per patient day = ₹ 70,83,500/14,600 = ₹ 485.17
Contribution (per patient day) = 2,34,34,500/14,600 = ₹ 1,605.10
BEP = ₹ 1,63,51,000/1,605.10 = 10,186.90 or say 10,187 patient days

Notes:

• Higher Charges for extra beds are a semi-variable cost; still, for the sake of convenience it has been considered a variable cost.
• Assumed, the hospital hired 250 beds at a charge of ₹ 950 per bed to accommodate the flow of patients. However, this never exceeded the 10 beds above the normal capacity of 50 beds on any day.
• The fees were paid based on the number of patients attended to and the time spent by them, which on an average worked out to ₹ 5,50,000 p.m.

Question 21.
ABC Health care runs an Intensive Medical Care Unit. For this purpose, it has hired a building at a rent of ₹ 50,000 per month with the agreement to bear the repairs and maintenance charges also.
The unit consists of 100 beds and 5 more beds can comfortably be accommodated when the situation demands. Though the unit is open for patients all the 365 days in a year, scrutiny of accounts for the year 2020 reveals that only for 120 days in the year, the unit had the full capacity of 100 patients per day and for another 80 days, it had, on an average only 40 beds occupied per day. But, there were occasions when the beds were full, extra beds were hired at a charge of ₹ 50 per bed per day. This did not come to more than 5 beds above the normal capacity on any one day. The total hire charges for the extra beds incurred for the whole year amounted to ₹ 20,000.
The unit engaged expert doctors from outside to attend on the patients and the fees were paid on the basis of the number of patients attended and time spent by them which on an average worked out to ₹ 30,000 per month in the year 2020.
The permanent staff expenses and other expenses of the unit were as follows:

 ₹ 2 Supervisors each at a per month salary of: 5,000 4 Nurses each at a per month salary of 3,000 2 Ward boys each at a per month salary of 1,500 Other Expenses for the year were as under: Repairs and Maintenance 28,000 Food supplied to patients 4,40,000 Caretaker and Other services for patients 1,25,000 Laundry charges for bed linen 1,40,000 Medicines supplied 2,80,000 Cost of Oxygen etc. other than directly borne for treatment of patients 75,000 General Administration Charges allocated to the unit 71,000

Required:
(i) What is the profit per patient day made by the unit in the year 2020, if the unit recovered an overall amount of ? 200 per day on an average from each patient.
(ii) The unit wants to work on a budget for the year 2021, but the number of patients requiring medical care is a very uncertain factor. Assuming that same revenue and expenses prevail in the year 2021 in the first instance, work out the number of patient days required by the unit to break even. [CA Inter Jan 2021, 10 Marks]
Number of Patient Days
120 days × 100 beds = 12,000
80 days × 40 beds = 3,200
Extra Bed = 400
Total ⇒ 12,000 + 3,200 + 400 = 15,600

(i) Statement of Profitability

 ₹ Revenue (15,600 patient days × ₹ 200 per day) 31,20,000 Variable Costs: Doctor Fees (₹ 30,000 per month × 12) 3,60,000 Food to Patients (Variable) 4,40,000 Caretaker Other services to patients (Variable) 1,25,000 Laundry charges (Variable) 1,40,000 Medicines (Variable) 2,80,000 Bed Hire Charges (₹ 50 × 400 Beds) 20,000 Total Variable costs 13,65,000 Contribution (Revenue Total Variable Costs) 17,55,000 Fixed Costs: Rent (₹ 50,000 per month × 12) 6,00,000 Supervisor (2 persons × ₹ 5,000 × 12) 1,20,000 Nurses (4 persons × ₹ 3,000 × 12) 1,44,000 Ward Boys (2 persons × ₹ 1500 × 12) 36,000 Repairs (Fixed) 28,000 Cost of Oxygen 75,000 Administration expenses allocated 71,000 Total Fixed Costs 10,74,000 Profit (Contribution Total Fixed Costs) 6,81,000

Profit per patient day = ₹ 6,81,000/15,600 – ₹ 43.65
Contribution (per patient day) = ₹ 17,55,000/15,600 = ₹ 112.50
(ii) BEP = ₹ 10,74,000/₹ 112.50 = 9,546.667 or say 9,547 patient days.

Question 22.
MRSL Healthcare Ltd. has incurred the following expenditure during the last year for its newly launched ‘COVID-19’ Insurance policy:

 ₹ Office administration cost 48,00,000 Claim management cost 3,80,000 Employees cost 16,20,000 Postage and Logistics 32,40,000 Policy issuance cost 29,50,000 Facilities cost 46,75,000 Cost of marketing of the policy 1,38,90,000 Policy development cost 35,00,000 Policy servicing cost 96,45,000 Sales support expenses 32,00,000 I.T. Cost ?

Number of Policy sold: 2,800
Total insured value of policies – ₹ 3,500 Crores
Cost per rupee of insured value – ₹ 0.002 You are required to:
(i) Calculate Total cost for “CGVID-19” Insurance policy segregating the costs into four main activities namely
(a) Marketing and Sales support
(b) Operations
(c) I.T. Cost and
(d) Support functions.
(ii) Calculate Cost per Policy. [CA Inter July 2021, 5 Marks]
(i) Statement showing Total cost for “COVTD-19” Insurance Policy

 Particulars ₹ Marketing and sales support: Policy development cost 35,00,000 Cost of marketing of the policy 1,38,90,000 Sales support expenses 32,00,000 Total (a) 2,05,90,000 Operations: Policy insurance cost 29,50,000 Policy servicing cost 96,45,000 Claims management cost 3,80,000 Total (b) 1,29,75,000 IT cost IT cost [Refer W.N.] 2,21,00,000 Total (c) 2,21,00,000 Support functions Postage and logistics 32,40,000 Facilities cost 46,75,000 Employees cost 16,20,000 Office administration cost 48,00,000 Total (d) 1,43,35,000 Total cost (a + b + c + d) 7,00,00,000

(ii) Cost per policy = $$\frac{\text { Total Cost }}{\text { No. of policies }}$$
= $$\frac{₹ 7,00,00,000}{2,800}$$
= ₹ 25,000

Working Note:
Calculation of IT cost:
Cost per rupee of insured value = $$\frac{\text { Total Cost }}{\text {Total insured value}}$$
0.002 = $$\frac{\text { Total cost }}{₹ 3,500}$$
Total cost = ₹ 3,500 crores × 0.002 = ₹ 7,00,00,000
IT cost = Total cost – Other costs
IT cost = ₹ 7,00,00,000 – ₹ 2,05,90,000 – ₹ 1,29,75,000 – ₹ 1,43,35,000
= ₹ 2,21,00,000

Costing For It

Question 23.
Following are the data pertaining to Infotech Pvt. Ltd. for the year 2020-21: ~

 ₹ Salary to Software Engineers (5 persons) 15,00,000 Salary to Project Leaders (2 persons) 9,00,000 Salary to Project Manager 6,00,000 Repairs & maintenance 3,00,000 Administration overheads 12,00,000

The company executes a Project XYZ, the details of the same are as follows: Project duration – 6 months
One Project Leader and three Software Engineers were involved for the entire duration of the project, whereas Project Manager spends 2 months’ efforts, during the execution of the project.
Travel expenses incurred for the project – ₹ 1,87,500
Two Laptops were purchased at a cost of ₹ 50,000 each, for use in the project and the life of the same is estimated to be 2 years
Prepare Project cost sheet considering overheads are absorbed on the basis of salary. [ICAI Module]
Project Cost Sheet

 ₹ Salary of Software Engineers (3 × ₹ 25,000 × 6 months) 4,50,000 Salary of Project Leader (₹ 37,500 × 6 months) 2,25,000 Salary of Project Manager (₹ 50,000 × 2 months) 1,00,000 Total Salary 7,75,000 Overheads (50% of salary) 3,38,000 Travel Expenses 1,87,500 Depreciation on Laptops [(₹ 1,00,000/2 years) × 6/12] 25,000 Total Project Cost 13,75,000

Working Notes:
(1) Calculation of Cost per month and Overhead absorption rate:

= ₹ 3,00,000 + ₹ 12,00,000 = ₹ 15,00,000

(3) Calculation of Overhead absorption rate
= Total Overhead / Total Salary = ₹ 15,00,000 / ₹ 30,00,000 = 50%

Question 24.
AD Higher Secondary School (AHSS) offers courses for 11th & 12th standard in three streams i.e. Arts, Commerce and Science. AHSS runs higher secondary classes along with primary and secondary classes but for account¬ing purpose it treats higher secondary as a separate responsibility centre. The Managing committee of the school wants to revise its fee structure for higher secondary students. The accountant of the school has provided the following details for a year:

 ₹ Teachers’ salary (15 teachers × ₹ 35,000 × 12 months) 63,00,000 Principal’s salary 14,40,000 Lab attendants’ salary (2 attendants × ₹ 15,000 × 12 months) 3,60,000 Salary to library staff 1,44,000 Salary’ to peons (4 peons × ₹ 10,000 × 12 months) 4,80,000 Salary to other staffs 4,80,000 Examinations expenditure 10,80,000 Office & Administration cost 15,20,000 Annual day expenses 4,50,000 Sports expenses 1,20,000

Other information:
(i)

(ii) One teacher who teaches economics for Arts stream students also teaches commerce stream students. The teacher takes 1,040 classes in a year, it includes 208 classes for commerce students.
(iii) There is another teacher who teaches mathematics for Science stream students also teaches business mathematics to commerce stream students. She takes 1,100 classes a year, it includes 160 classes for commerce students.
(iv) One peon is fully dedicated for higher secondary section. Other peons dedicate their 15% time for higher secondary section.
(v) All school students irrespective of section and age participate in annual functions and sports activities.
Requirement:
(a) CALCULATE cost per student per annum for all three streams.
(b) If the management decides to take uniform fee of ₹ 1,000 per month from all higher secondary students, Calculate stream wise profitability.
(c) If management decides to take 10% profit on cost, Compute fee to be * charged from the students of all three streams respectively. [CA Inter May 2020, RTP]
Calculation of Cost per annum

(a) Calculation of cost per student per annum

(b) Calculation of profitability

(c) Computation of fees to be charged to earn a 10% profit on cost

 Arts (₹) Commerce (₹) Science (₹) Cost per student per annum Add: Profit @10% Fees per annum Fees per month 17,397 1,740 9,533 953 19,238 1,924 19,137 10,486 21,162 1,595 874 1,764

Working Notes:
(1) Teachers’ salary

 Arts Commerce Science No. of teachers Salary per annum (₹)Total salary 4 4,20,000 5 4,20,000 6 4,20,000 16,80,000 21,00,000 25,20,000

(2) Re-apportionment of Economics and Mathematics teachers’ salary

(3) Principal’s salary has been apportioned on the basis of time spent by him for administration of classes.
(4) Lab attendants’ salary has been apportioned on the basis of lab classes attended by the students.
(5) Salary of library staffs are apportioned on the basis of time spent by the students in library.
(6) Salary of Peons are apportioned on the basis of number of students. The peons’ salary allocable to higher secondary classes is calculated as below:

 ₹ Peon dedicated for higher secondary (1 peon × ₹ 10,000 × 12 months) Add: 15% of other peons’ salary [15% of (3 peons × ₹10,000 × 12 months)] 1,20,000 54,000 1,74,000

(7) Salary to other staffs, office & administration cost, Annual day expenses and sports expenses are apportioned on the basis of number of students.
(8) Examination Expenses has been apportioned taking number of students and number of examinations into account.

Question 25.
A company wants to outsource the operation of its canteen to a contractor. The company will provide space for cooking, free electricity and furniture in the canteen. The contractor will have to provide lunch to 300 workers of which 180 are vegetarian (Veg) and the rest are non-vegetarian (Non-Veg). In the case of non-veg meals, there will be a non-veg item in addition to the veg items. A contractor who is interested in the contract has analysed the costs likely to be incurred. His analysis is given below:

 Cereals ₹ 8 per plate Veg items ₹ 5 per plate Non-veg items ₹ 15 per plate Spices ₹ 1 per plate Cooking oil ₹ 4 per plate One cook Salary ₹ 13,000 per month Three helpers Salary ₹ 7,000 per month per head Fuel Two commercial cylinders per month, price ₹ 1,000 each.

On an average the canteen will remain open for 25 days in a month. The contractor wants to charge the non-veg meals at 1.50 times of the veg meals.
You are required to calculate:
(i) The price per meal (veg and non-veg separately) that contractor should quote if he wants a profit of 20% on his takings.
(ii) The price per meal (separately for veg and non-veg) that a worker will be required to pay if the company provides 60% subsidy for meals out of
No. of Meals per day: Veg =180 meals
Non-Veg = 120 meals (300 – 180)
No. of Meals per month: Veg (180 meals × 25 days) = 4,500
Non-Veg (120 meals × 25 days) = 3,000
Total = 7,500

Calculation of amount chargeable by Contractor

 ₹ Cereals (8 × 7,500) 60,000 Cooking Oil (4 × 7,500) 30,000 Veg items (5 × 7,500) [Incurred for both veg and non-veg workers] 37,500 Spices (1 × 7,500) 7,500 Non-Veg items (15 × 3,000) [Incurred only for non-veg workers] 45,000 Salary of Cook 13,000 Salary of Helpers (7,000 × 3) 21,000 Fuel (1,000 × 2) 2,000 Total Cost 2,16,000 Profit [20% on Takings or 25% on cost] 54,000 Amount chargeable by contractor 2,70,000

(i) It is given that the contractor wants to charge the non-veg meals at 1.50 times of the veg meals.

 Equivalent No. of Veg Meals (3,000 × 1.5) 4,500 No. of Non-Veg Meals 4,500 Total 9.000

Price per Veg Meal = $$\frac{₹ 2,70,000}{₹ 9,000}$$ = ₹ 30
Price per Veg Meal = ₹ 9,000 = ₹ 30
Price per Non-Veg. Meal = ₹ 30 × 1.5 = ₹ 45

(ii)Price per meal that a worker required to pay after subsidy:
Veg meal = ₹ 30 – (6096 subsidy of ₹ 30) = ₹ 12
Non-Veg Meal = ₹ 45 – (60% subsidy of ₹ 45) = ₹ 18

## Standard Costing – CA Inter Costing Study Material

Standard Costing – CA Inter Cost and Management Accounting Study Material is designed strictly as per the latest syllabus and exam pattern.

## Standard Costing – CA Inter Costing Study Material

Standard Costing:
A technique which uses standards for costs and revenues for the purposes of control through variance analysis.

Variance:
A divergence from the pre-determined rates.

Process of Standard Costing:

• Setting standards
• Ascertaining actual costs
• Compare standard cost and actual cost
• Investigate the reasons for variances
• Disposed-off the variance

Types of Variance:

• Controllable variances: Those variances which can be controlled under normal operating conditions if a responsibility centre takes preventive measures and acts prudently.
• Uncontrollable variances: Those variances w’hich occurs due to conditions which are beyond the control of a responsibility centre and cannot be controlled even though all preventive measures are in place.
• Favourable variance: Variances which are profitable for the company. Denoted by capital ‘F’
• Adverse variances: Variances which causes loss to the company. Denoted by capital ‘A’.

Classification of Variances

SQ = Standard Quantity of Input for the Actual Output
SP = Standard Price of Material
AQ = Actual Quantity of Input
AP = Actual Price of Material
RSQ = Revised Standard Quantity = Standard Mix for the total Actual Input

SH = Standard Hours for the Actual Output
SR = Standard Rate of Labour
AHworked = Actual Hours worked
AHpaid = Actual Hours paid
AR = Actual Rate of Labour
RSH = Revised Standard Hours = Standard Mix for the total Actual Hours worked.
Note: AHpaid = AHworked, where hours paid and hours worked is same.

SH = Standard Hours for the Actual Output I
SR = Standard Rate of Variable O/h
AHworked = Actual Hours worked
AR = Actual Rate of Variable 0/h

Theory Questions

Question 1.
What are the types of standards?
(i) Ideal Standards: These represent the level of performance attainable when prices for material and labour are most favourable, when the highest output is achieved with the best equipment and layout and when the maximum efficiency in utilisation of resources results in maximum output with minimum cost.

(ii) Normal Standards: These are standards that may be achieved under normal operating conditions. The normal activity has been defined as “the number of standard hours which will produce at normal efficiency sufficient good to meet the average sales demand over a term of years”.

(iii) Basic or Bogey Standards: These standards are used only when they are likely to remain constant or unaltered over a long period. According to this standard, a base year is chosen for comparison purposes in the same way as statisticians use price indices. Since basic standards do not represent what should be attained in the present period, current standards should also be prepared if basic standards are used.

(iv) Current Standards: These standards reflect the management’s anticipation of what actual costs will be for the current period. These are the costs which the business will incur if the anticipated prices are paid for the goods and services and the usage corresponds to that believed to be necessary to produce the planned output.

Question 2.
Describe the various steps involved in adopting standard costing system in an organization. [CA Inter Nov. 2015, 4 Marks]
The Steps of standard costing is as below:

• Setting of Standards: The first step is to set standards which are to be achieved.
• Ascertainment of actual costs: Actual cost for each component of cost is ascertained from books of account, material invoices, wage sheet, charge slip etc.
• Comparison of actual cost and standard cost: Actual costs are compared with the standards costs and variances are determined.
• Investigation of variances: Variances arises are investigated for further action. Based on this performance is evaluated and appropriate actions are taken.
• Disposition of variances: Variances arise are disposed off by transferring it the relevant accounts (costing profit and loss account) as per the accounting method (plan) adopted.

Question 3.
Discuss the steps involved in setting labour time standards. [CA Inter Dec. 2021, 5 Marks]
The following are the steps involved in setting labour standards:
(a) Standardization of product and product study is carried out as explained above.
(b) Labour specification: Types of labour and labour time is specified. Labour time specification is based on past records and it takes into account normal wastage of time.
(c) Standardization of methods: Selection of proper machines to use proper sequence and method of operations.
(d) Manufacturing layout: A plan of operation for each product listing the operations to be performed is prepared.
(e) Time and motion study: It is conducted for selecting the best way of completing the job or motions to be performed by workers and the standard time that an average worker will take for each job. This also takes into account the learning efficiency and learning effect.
(f) Training and trial: Workers are trained to do the work and time spent at the time of trial run is noted down.

Question 4.
Describe three distinct groups of variances that arise in standard costing. [CA Inter May 2018, May 2000, 6 Marks]
The three distinct groups of variances that arise in standard costing are:

• Variances of efficiency. These are the variance, which arise due to efficiency or inefficiency in use of material, labour etc.
• Variances of prices and rates: These are the variances, which arise due to changes in procurement price and standard price.
• Variances due to volume: These represent the effect of difference between actual activity and standard level of, activity.

Question 5.
Under the single plan, record the journal entries giving appropriate narration, with indication of amounts of debits or credits alongside the entries, for the following transactions using the respective control A/c.
(i) Material price variance {on purchase of materials)
(ii) Material usage variance (on consumption)
(iii) Labour rate variance. [CA Final Nov. 2006, 6 Marks]
Under the single plan, Journal entries are:
(i) Material price variance (on purchase of materials)

(ii) Material usages variance (on consumption)

(iii) Labour Rate Variance:

Question 6.
What are the advantages of Standard Costing? [ICA1 Module]

• It serves as a basis for measuring operating performance and cost control.
• It aids in price fixing.
• It facilitates the estimation of the cost of new products with greater accuracy.
• It is also used for the measurement of profit.
• It is useful in planning, budgeting and decision-making.
• It serves as an incentive to the departmental head to achieve the targets set by the company.

Question 7.
What are the criticisms of Standard Costing? [ICAI Module]

• Variation in price: One of the main problems faced in the operation of the standard costing system is the precise estimation of likely prices or rate to be paid. The variability of prices is so great that even actual prices are not necessarily adequately representative of cost.
• Varying levels of output: If the standard level of output set for pre-determination of standard costs is not achieved, the standard costs are said to be not realised.
• Attitude of technical people: Technical people are accustomed to think of standards as physical standards and, therefore, they will be misled by standard costs.
• Mix of products: Standard costing presupposes a pre-determined combination of products both in variety and quantity. The mixture of materials used to manufacture the products may vary in the long run.
• Fixation of standards may be costly: It may require high order of skill and competency. Small concerns, therefore, feel difficulty in the operation of such system.

Practical Questions

Question 1.
UV Ltd. presents the following information for November, 2020:
Budgeted, production of product P = 200 units.
Standard consumption of Raw materials = 2 kg. per unit of P.
Standard price of material A = ₹ 6 per kg.
Actually. 230 units of P were produced and material A was purchased at ₹ 8 per kg and consumed at 1.8 kg per unit of P.
Calculate the Material Cost Variances. [CA Inter Nov. 2008, 3 Marks]
Actual production of P = 250 units
Standard quantity of material A for actual production (SQ) = 250 units × 2 kg. per unit = 500 kg.
Actual quantity of material A for actual production (AQ) = 250 units × 1.8 kg. per unit = 450 kg.
Standard price per kg. of material A(SP) = ₹ 6
Actual price per kg. of material A(AP) = ₹ 8
1. Total Material Cost Variance = (SP × SQ) – (AP × AQ)
= (₹ 6 × 500 kg.) – (₹ 8 × 450 kg.)
= ₹ 3,000 – ₹ 3,600
= ₹ 600 (A)

2. Material Price Variance
=(SP – AP) × AQ
= (₹ 6 – ₹ 8) × 450 kg.
= 900 (A)

3. Material Usage Variance
= (SQ – AQ) × AP
= (500 kg. – 450 kg.) × ₹ 6
= 300 (F)

Question 2.
Following details relating to product X during the month of April, 2021 are available:
Standard cost per unit of X.
Materials: 50 kg @ 140/kg
Actual production: 100 units
Actual material cost: ₹ 42/kg
Material price variance: ₹ 9,800 (Adverse)
Material usage variance: ₹ 4,000 (Favourable)
Calculate the actual quantity of material used during the month April, 2021. [CA Intel May 2009, 2 Marks]
Standard quantity for actual production (SQ) = 5,000 kg.
Standard price per kg. (SP) = ₹ 40
Material Usage Variance = (SQ – AQ) × SP
₹ 4,000 = (5,000 – AQ) × ₹ 40
₹ 4,000/₹ 40 = 5,000 – AQ
100 = 5,000 – AQ
AQ = 5,000 – 100
AQ = 4,900 kgs.
Actual quantity of material used during the month of April = 4,900 kgs.

Question 3.
Following are the details of the product Phomex for the month of April 2021:
Standard quantity of material required per unit – 5 kg
Actual output – 1000 units
Actual cost of materials used – ₹ 7,14,000
Material price variance – ₹ 51,000 (Fav)
Actual price per kg of material is found to be less than standard price per kg of material by ₹ 10.
You are required to calculate:
(i) Actual quantity and Actual price of materials used.
(ii) Material Usage Variance.
(iii) Material Cost Variance. [CA Inter May 2013, 5 Marks]
Actual output = 1,000 units
Standard quantity for actual production (SQ) = 1,000 units × 5 kg per unit
= 5,000 kg
Actual cost of material = AQ × AP
= ₹ 7,14,000
Actual price per kg = SP – 10

(i) Actual Quantity and Actual Price of material used
Material Price Variance = (SP – AP) × AQ
₹ 51,000 = [SP – (SP – 10)] × AQ
₹ 51,000 = [SP – SP + 10] × AQ
₹ 51,000/10 = AQ
AQ = 5,100 kgs

Actual cost of material = AQ × AP
₹ 7,14,000 = 5,100 × AP
₹ 7,14,000/5,100 = AP
AP = ₹ 140
Standard price per kg. (SP) = AP + 10
= ₹ 140 + 10
= ₹ 150

(ii) Material Usage Variance = (SQ – AQ) × SP
= (5,000 – 5,100) × ₹ 150
= ₹ 15,000 (A)

(iii) Material Cost Variance = (SP × SQ) – (AP × AQ)
= ₹ 150 × 5,000 – ₹ 140 × 5,100
= ₹ 36,000 (F)
OR
= Material Price Variance + Material Usage Variance
= ₹ 51,000 (F) + ₹ 15,000 (A)
= ₹ 36,000 (F)

Question 4.
XYZ Limited produces an article and uses a mixture of material X and Y. The standard quantity and price of materials for one unit of output is as under:

 Material Quantity Price (₹) X 2000 Kg 1.00 per kg. Y 800 Kg 1.50 per kg.

During a period, 1500 units were produced. The actual consumption of materials and prices are given below:

 Material Quantity Price (₹) X 31,00,000 kg 1.10 per kg. Y 12.50,000 kg 1.60 per kg.

Calculate:
(i) Standard cost for actual output
(ii) Material cost variance
(iii) Material Price variance
(iv) Material usage variance [CA Inter Nov. 2017, 8 Marks j
(i) Standard cost for Actual output:

Standard quantity for actual production (SQ):
Material X = 1,500 units × 2,000 kg = 30,00,000 kg
Material Y = 1,500 units × 800 kg = 12, 00, 000 kg

Question 5.
Beta Ltd. is manufacturing Product N. This is manufactured by mixing two materials namely Material P and Material Q. The Standard Cost of Mixture is as under:
Material P 150 Itrs. @ ₹ 40 per 3tr.
Material 0 100 Itrs. @ ₹ 60 per ltr.
Standard loss @ 20% of total input is expected during production.
The cost records for the period exhibit following consumption:
Material P 140 Itrs. @ ₹ 42 per ltr,
Material Q 110 Itrs. @ ₹ 56 per ltr,
Quantity produced was 195 ltrs.
Calculate:
(i) Material Cost Variance
(ii) Material Osage Variance
(iii) Material Price Variance [CA Inter May 2018, 5 Marks]
Statement showing computation of Standard Cost/Actual Cost/Revised Actual Quantity

Computation of Variances:
Material Cost Variance = Standard cost – Actual cost
A = ₹ 5,850 – ₹ 5,880 = ₹ 30 (A)
B = ₹ 5,850 – ₹ 6,160 = ₹ 310 (A)
Total = ₹ 340 (A)

Material Usage Variance = SP × (SQ – AQ)
A = 140 × (146.25 ltr. -140 ltr.) = ₹ 250 (F)
B = ₹ 60 × (97.50 ltr. – 110 ltr.) = ₹ 750 (A)
Total = ₹ 500 (A)

Material Price Variance = AQ × (SP – AP)
A – 140 Kg. × (₹ 40 -142) = ₹ 280 (A)
B = 110 Kg. × (₹ 60 – ₹ 56) = ₹ 440 (F)
Total = ₹ 160(F)

Workings:
The good output is 195 ltr. Therefore, the standard quantity of material required for 195 Itr. of output is = 195/80 × 100 = 243.75 ltr.

Question 6.
The standard cost of a chemical mixture is as follows:
60% of Material A @ ₹ 50 per kg
40% of Material B @ ₹ 60 per kg
A standard loss of 25% on output is expected in production. The cost records for a period have shown the following usage.
540 kg of Material A @ ₹ 60 per kg
260 kg of Material B @ ₹ 50 per kg
The quantity processed was 680 kilograms of good product.
From the above given information Calculate:
(i) Material Cost Variance
(ii) Material Price Variance
(iii) Material Usage Variance
(iv) Material Mix Variance
(v) Material Yield Variance. [CA Inter Nov. 2019, 10 Marks]
Basic Calculation

Standard cost for actual output = ₹ 43,200 × $$\frac{680}{640}$$ = ₹ 45,900

Calculation of Variances:
(i) Material Cost Variance = (Std. cost of actual output – Actual cost)
= (SQ × SP) – (AQ – AP)
= ₹ 45 900 – ₹ 45 400
= ₹ 500 (F)

(ii) Material Price Variance (SP – AP) × AQ
Material A = ( 50- 60) × 540 = ₹ 5400 (A)
Material B = (₹ 60 – ₹ 50) × 260 = ₹ 2600 (F)
Total = ₹ 2800 (A)

(iii) Material Usage Variance = (SQ – AQ) × AP
Material A = (480 × $$\frac{680}{640}$$ – 540) × ₹ 50 = ₹ 1,500 (A)
Material B = (320 × $$\frac{680}{640}$$ – 260) × ₹ 60 = ₹ 4,800 (F)
Total = ₹ 3,300 (F)

(iv) Material Mix Variance = SP × (RSQ – AQ)
Material A = ₹ SO × (480 Kg – 540 Kg) = ₹ 3,000 (A)
Material B = ₹ 60 × (320 Kg. – 260 Kg.) = ₹ 3,600 (F)
Total = ₹ 600 (F)

(v) Material Yield Variance = SP × (SQ – RSQ)
Material A = ₹ 50 × (510 Kg. – 480 Kg) = ₹ 1,500 (F)
Material B = ₹ 60 × (340 Kg. – 320 Kg.) = ₹ 1,200 (F)
Total = ₹ 2,700 (F)

Working: RSQ = Standard mix for the actual input:
Material A = 800 × 60% = 480 Kg.
Material B = 800 × 40% = 320 Kg.

Question 7.
ABC Ltd. produces an article by lending two basic raw materials It operates a standard costing system and the following standards have been set for raw materials:

Opening stock of material is valued at standard price.
Calculate the following variances:
(i) Material price variance
(ii) Material usage variance
(iii) Material yield variance
(iv) Material mix variance
(v) Total Material cost variance [ICAIModule]
Actual quantity of material = Opening stock + Purchases – Closing stock
Material A = 35 + 800 – 5 = 830 kg.
Material B = 40 + 1,200 – 50 = 1,190 kg.

(i) Material price variance = AQ (SP – AP)
Material A = 795 kg. (₹ 4 – ₹ 4.25) = ₹ 198.75 (A)
Material B = 1,150 kg. (₹ 3 – ₹ 2.50) = ₹ 575.00 (F)
Total = ₹ 376.25 (F)

There will be no price variance in respect of opening stock, since already valued at standard price.

(ii) Material usage variance = SP (SQ – AQ)
Material A = 4 (800 – 830) = ₹ 120 (A)
Material B = 3(1,200 – 1,190) = ₹ 30(A)
Total = ₹ 90(A)

(iii)Material yield variance = SP (SQ – RSQ)
Material A = 4 (800 – 808) = ₹ 32(A)
Material B = 3 (1,200 – 1,212) = ₹ 36(A)
Total = ₹ 68(A)

(iv) Material mix variance = SP (RSQ – AQ)
Material A = 4 (808 – 830) = ₹ 88 (A)
Material B = 3(1,212 – 1,190) = ₹ 66(F)
Total = ₹ 22(A)

(v) Total material cost variance
= Std. cost for actual output – Actual cost
= (800 × 4 + 1200 × 3) – (35 × 4 + 795 × 4.25 + 40 × 3 + 1,150 × 2.50 )
= 6,800 – 6,513.75
= 286.25 (F)

Question 8.
The standard labour employment and the actual labour engaged in a 40 hours week for a job are as under:

Standard output: 2,000 units:
Actual output: 1,800 units
Abnormal Idle time 2 hours in the week
Calculate:
(i) Labour Cost Variance
(ii) Labour Efficiency Variance
(iii) Labour Idle Time Variance. [CA Inter Nov, 2012, 6 Marks]
Table Showing Standard & Actual Cost

Workings:
(i) Standard Hours (SH) for actual output

(ii) Actual Hours worked:
Skilled = 50 Workers × 40 Hours = 2,000 Hours
Semi-skilled = 30 Workers × 40 Hours = 1,200 Hours
Unskilled’ = 20 Workers × 40 Hours = 800 Hours

Calculation of Variances:
(i) Labour Cost Variance = (SH × SR) – (AH paid × AR)
Skilled worker = (2,340 hrs × ₹ 45) – (2,000 hrs × ₹ 50)
= ₹ 1,05,300 – ₹ 1,00,000 = ₹ 5,300 (F)

Semi-skilled worker Unskilled Worker = (720 hrs × ₹ 30) – (1,200 hrs × ₹ 35)
= ₹ 21,600 – ₹ 42,000
= ₹ 20,400 (A)

Unskilled Worker = (540 hrs × ₹ 15) – (800 hrs × ₹ 10)
= ₹ 8,100 – ₹ 8,000
= ₹100 (F)

(ii) Labour Efficiency Variance = SR × (SH – AH worked)
Skilled worker = ₹ 45 × (2,340 hrs. – 1,900 hrs.)
= ₹ 19,800 (F)

Semi-skilled worker = ₹ 30 × (720 hrs. – 1,140 hrs.)
= ₹ 12,600 (A)

Unskilled Worker = ₹ 15 × (540hrs. – 760 hrs.)
= ₹ 3,300 (A)

Total = ₹ 13,900 (F)

(iii) Labour Idle Time Variance = SR × Idle-Time (Hrs.)
Skilled worker = ₹ 45 × 100 = 14,500 (A)
Semi-skilled worker = ₹ 30 × 60 hrs = ₹ 1,800 (A)
Unskilled worker = ₹ 15 × 40 hrs = ₹ 600 (A)
Total = ₹ 6,900 (A)

Question 9.
A gang of workers normally consists of 30 skilled workers, 15 semiskilled workers and 10 unskilled workers. The are paid at standard rate per hour as under:

 Skilled ₹ 70 Semi- skilled ₹ 65 Unskilled ₹ 50

In a normal working week of 40 hours, the gang is expected to produce 2,000 units of output. During the week ended 31 st March, 2021, the gang consisted of 40 skilled, 10 semi-skilled and 5 unskilled workers. The actual w ages paid were at the rate of ₹ 75, ₹ 60 and ₹ 52 per hour respectively. Four hours were lost due to machine breakdown and 1,600 units were produced.
Calculate the following variances showing clearly adverse (A) or favourable (F)
(i) Labour Cost Variance
(ii) Labour Rate Variance
(iii) Labour Efficiency Variance
(iv) Labour Mix Variance
(v) Labour Idle Time Variance [CA Inter May 2019, 10 Marks]

Workings:
(a) Total Standard Hours for actual output

(b) Actual Hours worked:
Skilled = 40 Workers × 40 Hours
Semi-skilled =10 Workers × 40 Hours
Unskilled = 5 Workers × 40 Hours

(c) Actual Hours paid:
Skilled = 40 Workers × (40 – 4) Hours
Semi-skilled =10 Workers × (40 – 4) Hours =360 Hours
Unskilled = 5 Workers × (40 – 4) Hours =180 Hours

(d) Revised Standard Hours:

(i) Labour Cost Variance

 Types of workers (SH × SR) – (AR × AH Paid) ₹ Skilled 67,200 – 1,20,000 52,800 (A) Semi- Skilled 31,200 – 24,000 7,200 (F) Unskilled 16,000 – 10,400 5,600 (F) Total 1,14,400 – 1,54,400 40,000 (A)

(ii) Labour Rate Variance

 Types of workers AH worked × (SR – AR) ₹ Skilled 1,600 hours × (₹ 70.00 – ₹ 75.00) 8,000 (A) Semi- Skilled 400 hours × (₹ 65.00 -₹ 60.00) 2,000 (F) Unskilled 200 hours × (₹ 50.00 – ₹ 52.00) 400 (A) Total 6,400 (A)

(iii) Labour Efficiency Variance

 Types of workers SR × (SH – AH Worked) ₹ Skilled ₹ 70.00 × (960 hours – 1,440 hours) 33,600 (A) Semi- Skilled ₹ 65.00 × (480 hours – 360 hours) 7,800 (F) Unskilled ₹ 50.00 × (320 hours – 180 hours) 7,000 (F) Total 18,800 (A)

Alternatively labour efficiency can be calculated on basis of labour hours worked

 Types of workers SR × (SH – Actual Hours) ₹ Skilled ₹ 70.00 × (960 hours – 1,600 hours) 44,800 (A) Semi- Skilled ₹ 65.00 × (480 hours – 400 hours) 5,200 (F) Unskilled ₹ 50.00 × (320 hours – 200 hours) 6,000 (F) Total 33,600 (A)

(iv) Labour Mix Variance

 Types of workers SR × (Revised AH Worked – AH Worked) ₹ Skilled ₹ 70 ×  (1,080 hrs. – 1440 hrs.) 25,200 (A) Semi -Skilled ₹ 65 ×  (540 hrs. – 360 hrs.) 11,700 (F) Unskilled ₹ 50 ×  (360 hrs. – 180 Hrs.) 9,000 (F) Total 4,500 (A)

(v) Labour Idle Time Variance

 Types of workers SR × (AH Worked × AH Paid) ₹ Skilled ₹ 70.00 × (1,600 hours – 1,440 hours) 11,200 (A) Semi- Skilled ₹ 65.00 × (400 hours – 360 hours) 2,600 (A) Unskilled ₹ 50.00 × (200 hours – 180 hours) 1,000 (A) Total 14,800 (A)

Question 10.
The standard output of a Product ‘DJ’ is 25 units per hour in manufacturing department of a company employing 100 workers. In a 40 hours week, the department produced 960 units of product ‘DJ’ despite 5% of the time paid was lost due to an abnormal reason. The hourly wage rates actually paid were ₹ 6.20, ₹ 6.00 and ₹ 5.70 respectively to Group ‘A’ consisting 10 workers. Group ‘B’ consisting 30 workers and Group ‘C’ consisting 60 workers. The standard wage rate per labour is same for all the workers. Labour Efficiency Variance is given ₹ 240 (F).
You are required to compute:
(i) Total Labour Cost Variance
(ii) Total Labour Rate Variance
(iii) Total Labour Gang Variance
(iv) Total Labour Yield Variance, and
(v) Total Labour Idle Time Variance.
1. Total Labour Cost Variance = (SH × SR) – (AH × AR)
= (3,840 × 6) – 23,360
= 320A

2. Total Labour rate Variance = AH paid (SR – AR)
Group A = 400 hours (₹ 6 – ₹ 6.2)
GroupB = 1,200 hours (₹ 6 – ₹ 6)
Group C = 2,400 hours (₹ 6 – ₹ 5.7)

3. Labour Gang Variance = SR (RSH – AH worked)
Group A = ₹ 16 (380 hours – 380 hours) = Nil
Group B = ₹ 6 (1,140 hours – 1,140 hours) = Nil
Group C = ₹ 6 (2,280 hours – 2,280 hours) = Nil

4. Labour Yield Variance =SR (Total SH – Total AHworked)
= ₹ 6 (3,840 hrs. – 3800 hrs.)
= 240F

5. Labour Idle Variance = Total Idle Hrs. × SR
= 200 hrs. × ₹ 6
= ₹ 1,200A

Working Notes:
1. Standard man hours per unit = $$\frac{100 \mathrm{hrs}}{25 \text { units }}$$ = 4 hrs. per unit
2. Standard man hours for actual output = 960 units × 4 hrs. = 3,840 hrs.
3. Calculation of Actual Cost:

4. Calculation standard wage rate:
Labour efficiency variance = 240F
Standard hrs for actual production – Actual hrs. × SR = 240F
(3,840 – 3,800) × SR = 240F
Standard Rate (SR) = ₹ 6 per hr.

5. Calculation of Revised Standard Hour (RSH):

Question 11.
The following information is available from the cost records of Vatika & Co. For the month of August, 2020:

 Material purchased 24,000 kg ₹ 1,05,600 Material consumed 22,800 kg Actual wages paid for 5,940 hours ₹ 29,700 Unit produced 2160 units Standard rates and prices are: Direct material rate is ₹ 4.00 per kg Direct labour rate is ₹ 4.00 per hr. Standard input is 10 kg. for one unit Standard requirement is 2.5 hours per unit

Calculate all material and labour variances for the month of August, 2020. [CA Inter Nov. 2009, 8 Marks]
Material Variance
Actual production = 2,160 units
Standard quantity for actual production (SQ) = 2,160 units × 10 kg. = 21,600 kg.
Actual quantity for actual production (AQ) = 22,800 kg.
Standard price per kg. (SP) = ₹ 4
Actual price per kg. (AP) = 11,05,6004 – 24,000 kg = ₹ 4.40 per

(i) Material Cost Variance = (SQ × SP) – (AQ × AP)
= (2,1600 × ₹ 4) – (22,800 × ₹ 4.40)
= ₹ 13,920 (A)

(ii) Material Price Variance = AQ × (SP – AP)
= 22,800 × (₹ 4 – ₹ 4.40)
= ₹ 9,120 (A)

(iii) Material Usage Variance = SP × (SQ – AQ)
= ₹ 4 × (21,600 – 22,800)
= ₹ 4,800 (A)

Labour Variance
Standard labour hours (SH) = 2,160 units × 2.5 hours per unit
Actual labour hours (AH) = 5,940 hours
Standard rate (SR) = ₹ 4.00 per hour
Actual rate (AR) = $$\frac{₹ 29,700}{5,940 \text { hours }}$$ = ₹ 5.00 per hour

(iv) Labour Cost Variance = (SH × SR) – (AH × AR)
= (5,400 × ₹ 4) – (5,940 × ₹ 5)
= ₹ 8,100 (A)

(v) Labour Rate Variance = AH × (SR – AR)
= 5,940 × (₹ 4 – ₹ 5)
= ₹ 5,940 (A)

(vi) Labour Efficiency Variance = SR (SH – AH)
= ₹ 4 × (5,400 – 5,940)
= ₹ 2,160 (A)

Question 12.
JVG Ltd. produces a product and operates a standard costing system and value material and finished goods inventories at standard cost. The information related with the product is as follows:

 Cost per unit (₹) Direct materials (30 kg at × 350 per kg) 10,500 Direct labour (5 hours at × 80 per hour) 400

The actual information for the month just ended is as follows:
(a) The budgeted and actual production for the month of September 2021 is 1,000 units.
(b) Direct materials – 5,000 kg at the beginning of the month. The closing balance of direct materials for the month was 10,000 kg. Purchases during the month were made at ₹ 365 per kg. The actual utilization of direct materials was 7,200 kg more than the budgeted quantity.
(c) Direct labour – 5,300 hours were utilised at a cost of ₹ 4,34,600.
You are required to calculate:
(i) Direct Material Price Variance
(ii) Direct Material Usage variance
(iii) Direct Labour Rate Variance
(iv) Direct Labour Efficiency Variance [CA Inter Nov. 2019, RTP]
Quantity of material purchased and used.

 No. of units produced 1,000 units Std. input per unit 30 kg. Std. quantity (Kg.) 30,000 kg. Add: Excess usage 7,200 kg. Actual Quantity 37,200 kg. Add: Closing Stock 10,000 kg. Less: Opening stock 5,000 kg. Quantity of Material purchased 42,200 kg.

(i) Direct Material Price Variance = AQ purchased (SP – AP)
= 42,200 kg. × (₹ 350 – ₹ 365) .
= ₹ 6,33,000 (A)

(ii) Direct Material Usage Variance = SP (SQ – AQ)
= ₹ 350 (30,000 kg. – 37,200 kg.)
= ₹ 25,20,000 (A)

(iii) Direct Labour Rate Variance = AH (SR – AR)
= 5,300 hours (₹ 80 – ₹ 82)

(iv) Direct Labour Efficiency Variance = SR (SH – AH)
= ₹ 80 (1,000 units × 5 hrs. – 5,300 hrs.)

Question 13.
Following information relates to labour of KAY PEE Ltd.:

The standard output of gang was 12 units per hour of the product M. The gang was engaged for 200 hours during the month of March 2021 out of which 20 hours were lost due to machine breakdown and 2,295 units of product M were produced. The actual number of skilled workers was 2 times the semi skilled workers. Total labour mix variance was ₹ 10,800 (A).
You are required to calculate the following:
(i) Actual number of workers in each category.
(ii) Labour rate variance.
(iii) Labour yield variance.
(iv) Labour efficiency variance. [CA Inter May 2019, 8 Marks]
(i) Actual Numbers of Workers in Each Category
Assumed Semi-skilled Workers = L
Total Labour Mix Variance
= Total Actual Time Worked (hours) × {Average Standard Rate per hour of Standard Gang Less: Average Standard Rate per hour of Actual Gang*} *on the basis of hours worked

L = 7
Semi-skilled = 7 (as above)
Skilled = 14(twice of 7)
Unskilled = 4(balance out of 25)

(ii) Labour Rate Variance = Actual Hours Paid × (Standard Rate – Actual Rate)
Skilled Workers = 2,800 hrs. × (₹ 75 – ₹ 80)
= 14,000(A)
Semi-skilled 1,400 hrs. × ( 50 – ₹ 48)
= 2,800(F)
Unskilled Workers 800 hrs. × (₹ 40 – ₹ 42)
= 1,600(A)
Total = 14,000(A) + 2,800(F) + 1,600(A)
= 12,800 (A)

(iii) Labour Yield Variance
= Average Standard Rate per hour of Standard Gang × {Total Standard
Time (hours) Less Total Actual Time Worked (hours)j
= $$\left(\frac{₹ 2,86,875}{4,781.25 \text { hrs. }}\right)$$ × (4,781.25 hrs – 4,500 hrs)
= ₹ 16,875 (F)

(iv) Labour Efficiency Variance
= Std. Rate × (Std. Hours – Actual Hours Worked)
= ₹ 75 × (2,295 hrs. – 2,520 hrs.)
= ₹ 16,875 (A).
= ₹ 50 × (1,530 hrs. – 1,260 hrs.)
= ₹ 13,500 (F)
= ₹ 40 × (956.25 hrs. – 720 hrs.)
= ₹ 9,450 (F)
= ₹ 16,875 (A) + ₹ 13,500 (F) + ₹ 9,450 (F)
= ₹ 6,075 (F)

Statement Showing “Standard & Actual Cost”

Question 14.
ABC Ltd. had prepared the following estimation for the month of January:

 Quantity Rate (₹) Amount (₹) Material-A 800 kg. 90.00 72,000 Material-B 600 kg. 60.00 36,000 Skilled labour 1,000 hours 75.00 75,000 Unskilled labour 800 hours 44.00 35,200

Normal loss was expected to be 10% of total input materials and an idle labour time of 5% of expected labour hours was also estimated.
At the end of the month the following information has been collected from the cost accounting department:
The company has produced 1,480 kg. finished product by using the followings:

 Quantity Rate (₹) Amount (₹) Material-A 900 kg. 86.00 77,400 Material-B 650 kg. 65.00 42,250 Skilled labour 1,200 hours 71.00 85,200 Unskilled labour 860 hours 46.00 39,560

You are required to calculate:
(a) Material Cost Variance
(b) Material Price Variance;
(c) Material Mix Variance
(d) Material Yield Variance;
(e) Labour Cost Variance
(f) Labour Efficiency Variance and
(g) Labour Yield Variance. [CA Inter May 2020, RTPJ
Material Variances:
Calculation of Standard Quantity (SQ):

Calculation of Revised Standard Quantity (RSQ):

Calculation of Material variances
(a) Material Cost Variance (A + B) = (SQ × SP) – (AQ × AP)
= 1,26,900 – 1,19,650
= 7,250 (F)

(b) Material Price Variance (A + B) = (AQ × SP) – (AQ × AP)
= 1,20,000 – 1,19,650
= 350 (F)

(c) Material Mix Variance (A + B) = (RSQ × SP) – (AQ × SP)
= 1,19,580 – 1,20,000
= 420(A)

(d) Material Yield Variance (A + B) = (SQ × SP) – (RSQ × SP)
= 1,26,900 – 1,19,580
= 7,320 (F)

Labour Variances:
Calculation of Standard Hours (SH):

Calculation of Revised Standard Hours (RSH):

Calculation of Material Variances
(e) Labour Cost Variance (SkilLed + Unskilled) = (SH × SR) – (AH × AR)
= 1,22,992 – 1,24,760
= 1,768(A)

(f) Labour Efficiency Variance (Skilled +Unskilled) = (SH × SR) – (AH × SR)
= 1,22,992 – 1,27,840
= 4,848 (A)

(g) Labour Yield Variance (Skilled + Unskilled) = (SH × SR) – (RSH × SR)
= 1,22,992 – 1,26,1041
= 3,1 12 (A)

Question 15.
A manufacturing concern has provided following information related to fixer overheads;

 Standard Actual Output in a month 5000 units 4800 units Working days in a month 25 days 23 days Fixed overheads ₹ 5,00,000 ₹ 4,90,000

Compute:
(iv) Fixed overhead efficiency variance [CA Into, Nov. 2018, 5 Mm ks]
= [(₹ 5,00,000 × 5,000) × 4,800] – ₹ 4,90,000
= ₹ 10,000 (A)

= ₹ 5,00,000 – ₹ 4,90,000
= ₹ 10,000 (F)

(iii) Fixed Overhead Volume Variance (Actual output – Budgeted output) × Budgeted fixed overhead per unit
= (4,800 units – 5,000 units) × ₹ 5,00,000 5000 units
= ₹ 20,000 (A)

= ₹ 4,80,000 – [(× 5,00,000 × 25) × 23]
= 120,000 (F)

Question 16.
AB Ltd. has furnished the following information:

 Budgeted Actual July 2016 Number of working days 25 27 Production (in units) 20,000 22,000 Fixed Overheads ₹ 30,000 | ₹ 31,000

Budgeted fixed overhead rate is ₹ 1.00 per hour. In July 2021, the actual hours worked were 31,500. In relation to fixed overheads, calculate:
(i) Efficiency Variance
(ii) Capacity Variance
(iii) Calendar Variance
(iv) Volume Variance
(v) Expenditure Variance [CA Inter May 2017, 5 Marks]
(i) Efficiency Variance = Budgeted fixed overhead per units × (Actual output – Standard output for actual hours)
= ₹ 1.50 × (22,000 units – 21,000 units)
= ₹ 1,500 (F)

(ii) Capacity Variance = Standard Rate × (Actual Hours – Budgeted Hours for actual days worked)
= ₹ 1.00 (31,500 hours – 32,400 hours)
= ₹ 900 (A)

(iii) Calendar Variance = Standard Fixed Overhead Rate per day × (Actual Working days – Budgeted working days)
= ₹ 1,200 (27 days – 25 days)
= ₹ 2,400 (F)

(iv) Volume Variance = Budgeted fixed overhead per units × (Actual output – Budgeted output)
= ₹ 1.50 (22,000 units – 20,000 units)
= ₹ 3,000 (F)

= ₹ 30,000 – ₹ 31,000
= ₹ 1,000 (A)

Workings:
(1) Budgeted Hours = ₹ 30,000/₹ 1 per hour = 30,000 hours
(2) Standard Fixed Overhead rate per hour (Standard Rate):
= Budgeted fixed overheads/Budgeted Hours = ₹ 30,000/30,000 hrs. = ₹ 1.00
(3) Budgeted fixed overhead per units = 30,000 hours/20,000 units × ₹ 1.00 = ₹ 1.50
(4) Standard hours for Actual Output = 22,000 units × 1.5 hours = 33,000 Hours
(5) Budgeted Overhead per day for budgeted days = 30,000/25 days = ₹ 1,200
(6) Budgeted Hours for Actual days worked = 30,000 hours/25 days × 27 days = 32,400 hours
(7) Standard output for actual hours = (31,500 hours × 20,000 units)/ ₹ 30,000 =21,000 units

Question 17.
A company has normal capacity of 100 machines working 8 hours per day of 25 days in a month. The budgeted fixed overheads of a month are ₹ 1,50,000. The standard time required to manufacture one unit of product is 4 hours. In a particular month the Company worked for 24 days of 750 machine hours per day and produced 4,500 units of the product. The actual fixed overheads incurred were ₹ 1,45,000
Compute:
(i) Efficiency variance
(ii) Capacity variance
(iiii) Calendar variance
(iv) Expenditure variance
(v) Volume variance
(vi) Total fixed overhead variance [CA Inter May 2001, 10 marks]
Computation of Variances in relation to Fixed Overheads:
(i) Efficiency Variance = Budgeted fixed overhead per units × (Actual output – Standard output for actual hours)
= ₹ 30 × (4,500 units – 4,500 units)
= Nil

(ii) Capacity Variance = Standard Rate per hour × (Actual Hours – Budgeted Hours for actual days worked)
= ₹ 7.50 (18,000 hours – 19,200 hours)
= ₹ 9,000 (A)

(iii) Calendar Variance = Standard Fixed Overhead Rate per day × (Actual Working days – Budgeted working days)
= ₹ 6,000 (24 days – 25 days)
= ₹ 6,000 (A)

= ₹ 1,50,000 – ₹ 1,45,000 = ₹ 5,000 (F)

(v) Volume Variance = Budgeted fixed overhead per units × (Actual output – Budgeted output)
= ₹ 30 × (4,500 units – 5,000 units)
= ₹ 15,000 (A)

= ₹ 1,35,000 – ₹ 1,45,000
= ₹ 10,000 (A)

Workings:
(1) Budgeted Units = 20,000 hours/4 units per hour = 5,000 units
(2) Standard Fixed Overhead rate per hour (Standard Rate) = Budgeted fixed overheads/Budgeted Hours = ₹ 1,50,000/20,000 hrs. = ₹ 7.50
(3) Budgeted fixed overhead per units = ₹ 1,50,000/5,000 units = ₹ 30
(4) Absorbed fixed overhead = 4,500 units × ₹ 1,50,000/5,000 units = ₹ 1,35,000
(5) Budgeted Overhead per day for budgeted days = 1,50,000/25 days = ₹ 6,000
(6) Budgeted Hours for Actual days worked = 20,000 hours/25 days × 24 days = 19,200 hours
(7) Standard output for actual hours = (18,000 hours × 5,000 units)/20,000 hours = 4,500 units.

Question 18.
ABC Ltd. has furnished the following information regarding the overheads for the month of June 2020:
(iii) Budgeted Hours for June, 2020 – 2,400 hours
(iv) Budgeted Overheads for June, 2020 – ₹ 12,000
(v) Actual rate of recovery of overheads – ₹ 8 Per lioin
From the above given information
Calculate:
(iii) Actual Hours for Actual Production
(v) Standard hours for Actual Production
(vi) Fixed Overhead Efficiency Variance [CA Inter Nov. 2020, 10 Marks]
= ₹ 2,800 (A) – ₹ 2,000 (A)
= ₹ 800 (A)

= ₹ 10,000 – Actual Overheads
= ₹ 12,800

(iii) Actual Hours for Actual Production = ₹ 12,800/₹ 8
= 1,600 hrs.

= (₹ 5 × 1600 hrs.) – ₹ 12,000 = ₹ 4,000 (A)

(v) Standard Hrs. for Actual Production = Absorbed Overheads/Std. Rate per hour
= ₹ 10,000/₹ 5 = 2,000 hrs.

= ₹ 10,000 – (₹ 5 × 1,600 hrs.)
= ₹ 2,000 (F)

Working Note:
Standard Rate per Hour = ₹ 12,000/2,400 hrs. = ₹ 5

Question 19.
The activity ratio of a concern is 95.6% whereas the capacity ratio is 105%. What is the efficiency ratio? [CA Inter May 2000, 2 Marks]
Efficiency ratio = $$\frac{\text { Activity ratio }}{\text { Capacity ratio }}$$ × 100
= $$\frac{95.6 \%}{105 \%}$$ × 100
= 91.04796

Question 20, A manufacturing firm produces a specific product and adopts standard costing system. The product is produced within a single cost centre.
Following information related to the product are available from the standard cost sheet of me product:
Unit Cost (₹)
Direct material 5 kg @ ₹ 15 per kg 75.00
Direct wages 4 hours @ ₹ 20 per hour 80,00
During the month of October 2021, the firm purchased 3,50,000 kg of material at the rate of ₹ 14 per kg. Production records for the month exhibits the following actual results:
Material used 3,20,000 kg.
Direct wages – 2,20,000 hours ₹ 46,20,000
The production schedule requires completion of 60,000 units in a month. However, the firm produced 62,000 units in the month of October, 2021. There are no opening and closing work-in-progress.
You are required to:
(i) Calculate Material Cost, Price and Usage Variance.
(ii) Calculate Labour Cost, Rate and Efficiency Variance; and
(iii) Calculate the amount ot bonus, as an incentive scheme is in operation in the company u hereby employees are paid a bonus of 50% of direct labour hour saved at standard direct labour hour rate. [CA Inter Nov, 2019, S Marks]
(i) Material Cost, Price and Usage Variance:
Material Cost Variance (on the basis of consumed quantity)
= SQ × SP – AQconsumed × AP
= (5 kg. × 62,000 units × ₹ 15) – (3,20,000 kg. × ₹ 14)
= ₹ 46,50,000 – ₹ 44,80,000 = ₹ 1,70,000 (F)
OR
Material Cost Variance (on the basis of purchased quantity)
= SQ × SP – AQPurchase × AP
= 3,10,000 × ₹ 15- 3,50,000 × ₹ 14
= ₹ 2,50,000 (A)
Material Price Variance (on the basis of consumed quantity)
= AQConsumed × SP – AQConsumed × AP
= (3,20,000 kg. × ₹ 15) – (3,20,000 kg. × ₹ 14)
= ₹ 3,20,000 (F)
OR
Material Price Variance (on the basis of purchased quantity)
= (SP – AP) × AQPurchase
= (₹ 15 – ₹ 14) × 3,50,000
= ₹ 3,50,000 (F)

Material Usage Variance
= SP × SQ – SP × AQConsumed
= (₹ 15 × 5 kg. ₹ 62,000 units) – (₹ 15 × 3,20,000 kg.)
= ₹ 46,50,000 – ₹ 48,00,000
= ₹ 1,50,000 (A)

(ii) Labour cost Variance = SH × SR – AH × AR
= 2,48,000 hrs. × ₹ 20 – 2,20,000 hrs. × ₹ 21
= ₹ 49,60,000 – ₹ 46,20,000
= ₹ 3,40,000 (F)
Labour Rate Variance = (SR – AR) × AH
= (₹ 20 – ₹ 21) × 2,20,000
= 2,20,000 (A)

Labour Efficiency Variance = (SH – AH) × SR
= (2,48,000 – 2,20,000) × ₹ 20
= 5,60,000 (F)

(iii)Hours Saved = 2,48,000 – 2,20,000 = 28000 hrs.
Bonus Rate = ₹ 20 × 5096 = ₹ 10
Bonus = 28,000 × ₹ 10 = ₹ 2,80,000

Question 21.
KPR Limited operates a system of standard costing in respect of one of its products which is manufactured within a single cost centre. The Standard Cost Card of a product is as under:

 Standard Unit cost (₹) Direct material 5 kgs @ ₹ 4.20 21.00 Direct labour 3 hours @ ₹ 3.00 9,00 Factory overhead ₹ 1.20 per labour hour 3.60 Total manufacturing cost 33.60

The production schedule for the month of June, 2021 required completion of 40,000 units. However, 40,960 units were completed during the month without opening and dosing work-inprocess inventories.
Purchases during the month of June, 2021, 2,25,000 kgs of material at the rate of ₹ 4.50 per kg. Production and Sales records for the month showed the following actual results.

 Material used 2,05,600 kgs. Direct labour 1,21,200 hours; cost incurred ₹ 3,87,840 Total factory overhead cost incurred ₹ 1,00,000 Sales 40,000 units

Selling price to be so fixed as to allow a mark-up of 20% on selling price.
Required:
(i) Calculate material variances based on consumption of material.
(ii) Calculate labour variances and the total variance for factory overhead.
(iii) Prepare Income statement for June, 2021 showing actual gross margin.
(iv) An incentive scheme is in operation in the company whereby employees are paid a bonus of 50% of direct labour hour saved at standard direct labour hour rate. Calculate the Bonus amount. [CA Inter Nov. 2007, 15 Marks]
(i) Material variances:
Standard Quantity (SQ) = 40,960 × 5 = 2,04,800 kgs.
Standard Price (SP) = ₹ 4.2
Actual Quantity (AQ) = 2,05,600 kgs.
Actual Price (AP) = ₹ 4.5

(a) Direct material cost variance = (SQ × SP) – (AQ × AP)
= (2,04,800 × 4.2) – (2,05,600 × 4.5)
= 8,60,160 – 9,25,200 – 65,040 (A)

(b) Material price variance = AQ (SP – AP)
= 2,05,600 (4.20 – 4.50)
= 61,680 (A)

(c) Material usages variance = SP (SQ – AQ)
= 4.20 (2,04,800 – 2,05,600)
= 3,360 (A)

(ii) Labour variances and overhead variances:
Standard Hours (SH) = 40,960 × 3 = 1,22,880 hrs.
Standard Rate (SR) = ₹ 3
Actual Hours (AH) = 1,21,200 hrs.
Actual Cost (AH × AR) (given) = ₹ 3,87,840
Actual Rate (AR) = ₹ 3,87,840/1,21,200 hrs. = ₹ 3.2

(a) Labour cost variance = (SH × SR) – (AH × AR)
= (1,22,880 × 3) – 3,87,840
= 19,200 (A)

(b) Labour rate variance = AH (SR – AR)
= 1,21,200 (3 – 3.20)
= 24,240 (A)

(c) Labour efficiency variance = SR (SH – AH)
= 3 (1,22,880 – 1,21,200)
= 5,040 (F)

= 40,960 × 3 × 1.20 – 1,00,000
= 47,456 (F)

(iii) Calculation of unit selling price

 ₹ Direct material 21.00 Direct labour 9.00 Factory overhead 3.60 Factory cost 33.60 Margin (25% on factory cost) 8.40 Selling price 42.00

Income statement

(iv) Labour hour saved

 Labour hour saved ₹ Standard labour hours (40,960 units × 3 hrs.) 1,22,380 Actual labour hour worked 1,21,200 Labour hour saved 1,680

Bonus for saved labour = 1,680 hrs. × ₹ 3 × 50% = ₹ 2,520

Question 22.
BabyMoon Ltd. uses standard costing system in manufacturing one of its product ‘Baby Cap’. The details are as follows:

 Direct Material 1 Meter @ 160 per meter ₹ 60 Direct Labour 2 hour @ ₹ 20 per hour ₹ 40 Variable overhead 2 hour @ ₹ 10 per hour ₹ 20 Total ₹ 120

During the month of August, 10,000 units of ‘Baby Cap’ were manufactured. Details are as follows:
Direct material consumed 11,400 meters @ ₹ 58 per meter
Direct labour Hours ? @ ? ₹ 4,48,800
Variable overhead efficiency variance is ₹ 4.000 A. Variable overheads are based on Direct Labour Hours.
You are required to calculate the following Variances:
(a) Material Variances – Material Cost Variance, Material Price Variance and Material Usage Variance.
(c) Labour variances – Labour Cost Variance, Labour Rate Variance and Labour Efficiency Variance. [CA Inter RTP Nov. 2021]
(a) Material Variances

Material Cost Variance = (SQ × SP) – (AQ × AP)
= 6,00,000 – 6,61,200
= ₹ 61,200 (A)

Material Price Variance = AQ (SP – AP)
= 11,400 (60 – 58)
= ₹ 22,800 (F)

Material Usage Variance = SP (SQ – AQ)
= 60 (10,000 – 11,400)
= ₹ 84,000 (A)

= (10,000 units × 2 hours × ₹ 10) – 2,24,400
= ₹ 24,400 (A)

Variable overhead Efficiency Variance = SR (SH – AH)
Let Actual Hours be ‘X’, then:
10 (20,000 – X) = 4,000 (A)
2,00,000 – 10X = – 4,000
X = 2,04,000 × 10
Therefore, Actual Hours (X) = 20,400

= 20,400 × ₹ 10 – 2,24,400 = ₹ 20,400 (A)

(c) Labour variances
Actual Rate = ₹ 4,48,800 × 20,400 hours = ₹ 22

Labour Cost Variance = (SH × SR) – (AH × AR)
= 4,00,000 – 4,48,800
= ₹ 48,800 (A)

Labour Rate Variance = AH (SR – AR)
= (20 – 22) × 20,400
= ₹ 40,800 (A)

Labour Efficiency Variance = SR (SH – AH)
= (20,000 – 20,400) × 20
= ₹ 8,000 (A)

Question 23.
The following information is available from the cost records of a Company for the month of July, 2021:

 (i) Material purchased 22,000 pieces ₹ 90,000 (ii) Material consumed 21,000 pieces (in) Actual wages paid for 5,150 hours ₹ 25,750 (iv) Fixed Factory overhead incurred ₹ 46,000 (v) Fixed Factory overhead budgeted ₹ 42,000 (vi) Units produced 1,900 (vii) Standard rates and prices are: Direct material ₹ 4.50 per piece Standard input 10 pieces per unit Direct labour rate ₹ 6 per hour Standard requirement 2.5 hours per unit Overheads ₹ 8 per labour hour

You are required to calculate the following variances:
(i) Material price variance
(ii) Material usage variance
(iii) Labour rate variance
(iv) Labour efficiency variance
(i) Material Price Variance = Actual Quantity × (Std. Price – Actual Price)
= 21,000 pcs × [₹ 4.50 – (₹ 90,000/22,000 pcs.)]
= ₹ 8.591(F)

(ii) Material Usage Variance = Std. price × (Std. Quantity – Actual Quantity)
= ₹ 4.50 × [(1,900 units × 10) – 21,000)]
= ₹ 9,000 (A)

(iii) Labour Rate Variance = Actual Hours × (Std. Rate – Actual Rate)
= 5,150 hours × [ 6 -(? 25,750/5,150 hours)]
= 5,150 (F)

(iv) Labour Efficiency Variance Std. Rate × (Std. Hours – Actual Hours)
= 6 × (1,900 units × 2.5 hours – 5,150 hours)
= 50 × (7,200 hrs. – 7,000 h rs.)
=2,400(A)

= 42,000 – 46,000
= 4,000 (A)

(vi) Fixed overhead expenditure = Std. rate per unit (Actual output – Standard variance output for actual hours)
= 20 × [1,900 units – (5,150/2.5 hours)]
= 3,200(A)

(vii) Fixed overhead capacity variance = Std. rate (Actual hours – Budgeted hours)
= 8 (5,150 hours – ₹ 42,000/? 8)
= ₹ 800 (A)

Question 24.
SP Limited produces a product ‘Tempex’ which is sold in a 10 Kg. packet. The standard cost card per packet of ‘Tempex’ are as follows:

 ₹ Direct Materials 8,900 @ ₹ 46 per Kg. 4,09,400 Direct Labour 7,000 hours @ ₹ 52 per hour 3,64,000 Variable Overhead incurred 72,500 Fixed Overhead incurred 1,92,000

Budgeted output for the third quarter of a year was 10,000 Kg. Actual output is 9,000 Kg.
Actual cost for this quarter is as follows:

 ₹ Direct Materials 8,900 Kg @ ₹ 46 per Kg. 4,09,400 Direct Labour 7,000 hours @ ₹ 52 per hour 3,64,000 Variable Overhead incurred 72,500 Fixed Overhead incurred 1,92,000

You are required to calculate:
(i) Material Usage Variance
(ii) Material Price Variance
(iii) Material Cost Variance
(iv) Labour Efficiency Variance
(v) Labour Rate Variance
(vi) Labour Cost Variance
(viii) Fixed Overhead Cost Variance [CA Inter Nov. 2011, Nov. 2013, 8 Marks]
Ans.
(i) Material Usage Variance = Std. Price X (Std. Quantity – Actual Quantity)
= ₹ 45 X (9,000 kgs. – 8,900 kgs.)
= ₹ 4,500 (F)

(ii) Material Price Variance = Actual Quantity X (Std. Price – Actual Price)
= 8,900 kgs. X (₹ 45 – ₹ 46)
= ₹ 8,900 (A)

(iii) Material Cost Variance = Std. Material Cost – Actual Material Cost
= (SQ × SP) – (AQ × AP)
= (9,000 kgs. × ₹ 45) – (8,900 kgs. × ₹ 46)
= ₹ 4,05,000 – ₹ 4,09,400
= ₹ 4,400 (A)

(iv) Labour Efficiency Variance = Std. Rate X (Std. Flours – Actual Hours)
= ₹ 50 × (9,000/10 × 8hrs. – 7,000hrs.)
= ₹ 50 × (7,200 hrs. – 7,000 hrs.)
= ₹ 10,000 (F)

(v) Labour Rate Variance = Actual Hours X (Std. Rate – Actual Rate)
= 7,000 hrs. × (₹ 50 – ₹ 52)
= ₹ 14,000 (A)

(vi) Labour Cost Variance = Std, Labour Cost – Actual Labour Cost
= (SH × SR) – (AH × AR)
= (7,200 hrs. × ₹ 50) – (7,000 hrs. × ₹ 52)
= ₹ 3,60,000 – ₹ 3,64,000
= ₹ 4,000 (A)

(vii) Variable Overhead Cost Variance = Std. Variable Cost – Actual Variable Cost
= (7,200 hrs. × ₹ 10) – ₹ 72,500
= ₹ 500 (A)

= (₹ 200/10kgs. ₹ 9,000 kgs.) – 1,92,000
= ₹ 1,80,000 – ₹ 1,92,000
= ₹ 12,000 (A)

Question 25.
The overhead expense budget for a factory producing to a capacity of 200 units per month is as follows:

 Description of overhead Fixed cost per unit (₹) Variable cost per unit (₹) Total cost per unit (₹) Power and fuel 1,000 500 1,500 Repair and maintenance 500 250 750 Printing and stationary 500 250 750 Other overheads 1,000 500 1,500 X 3,000 1,500 4,500

The factory has actually produced only Details of overheads actually incurred have been provided by the accounts department and are as follows:

 Description of overhead Actual cost Power and fuel ₹ 4,00,000 Repair and maintenance ₹ 2,00,000 Printing and stationary ₹ 1,75,000 Other overheads ₹ 3,75,000

You are required to calculate the overhead volume variance and tiie overhead expense variances. [ICAI Module]
Standard fixed overheads per unit (SR): ₹ 3,000 (Given)
Actual production : 100 units
Standard production (capacity) : 200 units
= (₹ 3,000 × 100 units) – (₹ 3,000 × 200 units)
= ₹ 3,00,000 – ₹ 6,00,000

For variable overhead = AQ (SR – AR)
= 100 units (₹ 1,500 – ₹ 1,500) = Nil

= (₹ 3,000 × 200 units) – (Total overhead – Variable overhead)
= (₹ 3,000 × 200 units) – (₹ 11,50,000 – ₹ 1,500 × 100 units)
= ₹ 6,00,000 – (₹ 11,50,000 – ₹ 1,50,000)
= ₹ 6,00,000 – ₹ 10,00,000

Question 26.
Premier Industries has a small factory where 52 workers are employed on an average for 25 days a month and they work 8 hours per day. The normal down time is 15%. The firm has introduced standard costing for cost control. Its monthly budget for November, 2020 shows that the budgeted variable and fixed overhead are ₹ 1,06,080 and ₹ 2,21,000 respectively.
The firm reports the following details of actual performance for November, 2020, after the end of the month:
Actual hours worked 8,100 hrs.
Actual production expressed in standard hours 8,800 hrs.

You are required to calculate:

(iii) Control Ratios:
(a) Capacity ratio.
(b) Efficiency ratio. [CA Inter Jan. 2021, 10 Marks]
= ($$\frac{₹ 1,06,080}{8,840}$$ × 8,100) – ₹ 1,02,000
= ₹ 4,800 (A)

=Std. rate per hour × (Std. hours for actual production – Actual hours)
= $$\frac{1,06,080}{8,840}$$ (8,8oo hours – 8,100 hours)
= ₹ 8,400 (F)

= ₹ 2,21,000 – ₹ 2,00,000
= ₹ 21,000 (F)

= Std rate × (Actual hours – budgeted hours)
= $$\frac{₹ 2,21,000}{8,840}$$ × (8,100 – 8,840)
= ₹ 18,500 (A)

= Std rate × (Std hours for actual production – Actual hours)
= $$\frac{₹ 2,21,000}{8,840}$$ × (8,800 – 8,100)
= ₹ 17,500 (F)

(iii) Control Ratios
(a) Capacity Ratio
= $$\frac{\text { Actual hours }}{\text { Budgeted hours }}$$ × 100
= $$\frac{8,100}{8,840}$$ × 100
= 91.63%

(b) Efficiency Ratio
= $$\frac{\text { Standard hours }}{\text { Actual hours }}$$ × 100
= $$\frac{8,800}{8,100}$$ × 100
= 108.64%

(c) Activity Ratio
= $$\frac{\text { Standard hours }}{\text { Budgted hours }}$$ × 100
= $$\frac{8,800}{8,840}$$ × 100
= 99.55%

Working: Calculation of budgeted hours
Budgeted hours = (52 × 25 × 8) × 85% = 8,840 hours.

Question 27.
SJ Ltd has furnished the following information:

 Standard overhead absorption rate per unit ₹ 20 Standard rare per hour ₹ 4 Budgeted production 12,000 units Actual production 15,560 units Actual hours 74,000

Actual overheads were ₹ 2,95,000 out of which ₹ 62,500 fixed. Overheads are based on the following flexible budget

 Production (units) 8,000 10,000 14.000 Total Overheads (₹) 1.80,000 2,10,000 2.70,000

Calculate following overhead variances on the basis of hours:
(iv) Fixed overhead capacity variance. [CA Inter May 2012, May 2015, 8 Marks]
(i) Variable Overhead efficiency variance :
= Standard Rate Per Hour × (Std. Hours – Actual Hours)
= ₹ 3 × (77,800 – 74,000)
= ₹ 11.400(F)

= Actual Hours × (Std. Rate Per Hour – Actual Rate Per Hour)
= 74,000 × (₹ 3 3.1419)
= ₹ 10,500 (A)

= Std. Rate Per Hour × (Std. Hours – Actual Hours)
= ₹ 1 × (77,800 – 74,000)
= ₹ 3,800 (F)

= Std. Rate Per Hour × (Actual Hours – Budgeted Hours)
= ₹ 1 × (74,000 – 60,000)
= ₹ 14,000 (F)

Workings:
(a) Variable overhead rate per unit:
= $$\frac{\text { Difference in Total overheads at two levels }}{\text { Difference in production units at two level }}=\frac{₹ 2,10,000-₹ 1,80,000}{10,000 \text { units }-8,000 \text { units }}$$
= ₹ 15 per unit

(b) Fixed overhead = ₹ 2,10,000 – (8,000 × ₹ 15) = ₹ 60,000

(c) Standard Hour Per Unit:
= $$\frac{\text { Standard Overhead Absoption rate }}{\text { Std.Rate per hour }}=\frac{₹ 20}{₹ 4}$$ = 5 hours

(d) Standard variable overhead rate per hour:
= $$\frac{\text { Variable overhead per unit }}{\text { Std. hours per unit }}=\frac{₹ 15}{5 \text { hours }}$$ = 3

(e) Standard Fixed Overhead Rate Per Hour = ₹ 4 – ₹ 3 = ₹ 1

(f) Actual Variable Overhead = ₹ 2,95,000 – ₹ 62,500
= ₹ 2,32,500

(g) Actual Variable Overhead Per Hour:
= $$\frac{₹ 2,32,500}{74,000 \text { hours }}$$ = ₹ 3.1419

(h) Budgeted hours = 12,000 × ₹ 5 = 60,000 hours

(i) Standard Hours for Actual Production = 15,560 × ₹ 5 = 77,800 hours

Question 28.
In a manufacturing company the standard units of production for the year were fixed at 1,20,000 units and overhead expenditures were estimated to be as follows:

 ₹ Fixed 12,00,000 Semi-variable (60% – Fixed; 40%- Variable) 1,80,000 Variable 6,00,000

Actual production during the month of April, 2021 was 8,000 units. Each month has 20 working days. During the month there w as one public holiday. The actual overheads were as follows:

 ₹ Fixed 1,10,000 Semi-variable (60% – Fixed; 40%- Variable) 19,200 Variable 48,000

You are required to calculate the following variances for the month of April 2021:
(vi) Calendar Variance [CA Inter Dec. 2021, 10 Marks]
Budgeted fixed o/h per unit = $$\frac{₹ 12,00,000+(60 \% \text { of } 1,80,000)}{1,20,000 \text { units }}$$ = ₹ 10.90
Budgeted variable o/h per unit = $$\frac{6,00,000+(40 \% \text { of } 1,80,000)}{1,20,000 \text { units }}$$ = ₹ 5.60
Actual fixed overhead = 1,10,000 + (60% of 19,200) = ₹ 1,21,520 (for April, 2021)
Actual variable overhead = 48,000 + (40% of 19,200) – ₹ 55,680.
Budgeted production per month = $$\frac{1,20,000 \text { units }}{12 \text { months }}$$ = 10,000 units
= [(₹ 10.90 + ₹ 5.60) × 8,000 units] – [₹ 1,21,520 + 55,680]
= ₹ 1,32,000 – ₹ 1,77,200
= ₹ 45,200 (A)

= (₹ 10.90 × 8,000 units) – ₹ 1,21,520
= ₹ 87,200 – ₹ 1,21,250
= ₹ 34,320 (A)

(iii) Variable over Cost Variance
= (₹ 5.60 × 8,000 units) – ₹ 55,680
= ₹ 44,800 – ₹ 55,680
= ₹ 10,880 (A)

= Budgeted Fixed overhead per unit × (Actual Output – Budgeted output)
= ₹ 10.90 × (8,000 – 10,000 units)
= ₹ 21,800 (A)

= Budgeted Fixed overhead per month – Actual Fixed overhead of the month
= (₹ 10.90 × 10,000 units) – ₹ 1,21,520
= ₹ 12,520 (A)

(vi) Calendar Variance
= Budgeted Fixed overhead per day × (Actual days – Budgeted days)
= ₹ 5,450 × (19 – 20)
= ₹ 5,450 (A)
Budgeted Fixed overhead per day = $$\frac{₹ 1,09,000}{20 \text { days }}$$ = ₹ 5,450

Question 29.
X Associates undertake to prepare income tax returns for individuals for a fee. They use the weighted average method and actual costs for the financial reporting purposes. However, for internal reporting, they use a standard costs system. The standards, based on equivalent performance, have been established as follows:

 Labour per return 5 hrs @ ₹ 40 per hour Overhead per return 5 hrs @ ₹ 20 per hour

For March 2021 performance, budgeted overhead is ₹ 98,000 for standard labour hours allowed. The following additional information pertains to the month of March 2021:

 March 1 Return-in-process (25% complete) 200 No. Return started in March 825 Nos. March 31 Return-in-process (80% complete) 125 Nos. Cost Data: March 1 Return-in-process: Labour ₹ 12,000 Overheads ₹ 5,000 March 1 to 31 Labour : 4,000 hours ₹ 1,78,000 Overheads ₹ 90,000

You are required to compute:
(a) For each element, equivalent units of performance and the actual cost per equivalent unit based on weightage average.
(b) Actual cost of return-in-process on March 31.
(c) The standard cost per return.
(d) The labour rate and labour efficiency variance as well as overhead volume and overhead expenditure variance. [CA Inter May 2016, 8 Marks]
(i) Statement Showing Cost Elements Equivalent Units of Performance and the Actual Cost per Equivalent Unit

 Costs: ₹ ₹ From previous month 12,000 5,000 During the month 1,78,000 90,000 Total Cost 1,90,000 95,000 Total equivalent units 1,000 1,000 Cost per Equivalent Unit 190.00 95.00

(ii) Actual cost of returns in process on March 31:

 Total (₹) Labour (125 returns ₹ 0.80 × ₹ 190,00) 19,000 Overhead (125 returns ₹ 0.80 × ₹ 95.00) 9,500 28,500

(iii) Standard Cost per Return:

 Total (₹) Labour (5 Hrs × ₹ 40 per hour) ₹ 200 Overhead (5 Hrs × ₹ 20 per hour) ₹ 100 ₹ 300

(iv) Computation of Variances:

 Statement Showing Output (March only) Element Wise Labour Overhead Actual performance in March in terms of units equivalent 1.000 1,000 Less: Returns in process at the beginning of March in terms of equivalent units z.e. 25% of returns (200) 50 50 950 950

Variance Analysis:
Labour Rate Variance:
= Actual Time × (Standard Rate – Actual Rate)
= Standard Rate × Actual Time – Actual Rate × Actual Time
= ₹ 40 × 4,000 hrs. – ₹ 1,78,000
= ₹ 18,000 (A)

Labour Efficiency Variance:
= Standard Rate × (Standard Time – Actual Time)
= Standard Rate × Standard Time – Standard Rate × Actual Time
= ₹ 40 × (950 units × 5 hrs.) – ₹ 40 × 4,000 hrs.
= ₹ 30.000(F)

= ₹ 98,000 – ₹ 90,000
= ₹ 8,000 (F)

= 950 Units × 5 hrs. × ₹ 20 – ₹ 98,000
= ₹ 3,000 (A)

Question 30.
SB Constructions Limited has entered into a big contract at an agreed price of X 1,50,00,000 subject to an escalation clause for material and labour as spent out on the contract and corresponding actuals are as follows:

You are required to:
(i) Give your analysis of admissible escalation claim and determine the final contract price payable.
(ii) Prepare the contract account, if the all expenses other than material and labour related to the contract are ? 13,45,000.
(iii) Calculate the following variances and verify them:
(a) Materia! cost variance
(b) Material price variance
(c) Material usage variance
(d) Labour cost variance
(e) Labour rate variance
(f) Labour efficiency variance [CA Inter May, 2010, 15 Marks]
(i) Statement showing additional claim due to escalation clause.

Statement showing Final Contract Price

(ii) Contract Account:

(iii) Material Variances:

Material Price Variance (MCV) = (SQ × SP) – (AQ × AP)
= ₹ 99,20,000 – ₹ 1,05,25,000 = ₹ 6,05,000 (AP)

Material Price Variance (MPV) = AQ (SP – AP) or (AQ × SP) – (AQ × AP)
= ₹ 1,03,40,000 – ₹ 1,05,25,000
= ₹ 1,85,000 (A)

Material usage variance (MUV) = (SQ × SP) – (AQ × SP)
= ₹ 99,20,000 – ₹ 1,03,40,000
= ₹ 4,20,000 (A)

Labour Variances

Labour Cost Variance (LCV) = (SH × SR) – (AH × AR)
= ₹ 21,00,000 – ₹ 23,38,000
= ₹ 2,38,000 (A)

Labour Rate Variance (LRV) = (AH × SR) – (AH × AR)
= ₹ 19,80,000 – ₹ 23,38,000
= ₹ 3,58,000 (A)

Labour Rate Variance (LEV) = (SH × SP) – (AH × SP)
= ₹ 21,00,000 – ₹ 19,80,000
= ₹ 1,20,000 (F)

## Process and Operation Costing – CA Inter Costing Study Material

Process and Operation Costing – CA Inter Cost and Management Accounting Study Material is designed strictly as per the latest syllabus and exam pattern.

## Process and Operation Costing – CA Inter Costing Study Material

1. Treatment:

• Normal Process Loss: Loss of material which is inherent in the nature of work. The cost of normal process loss after considering sale of scrap is absorbed by good units.
• Abnormal Process Loss: It is the loss in excess of pre-determined normal loss. The cost of abnormal process loss is charged to costing profit and loss account.
• Abnormal Gain: It arises when the actual production exceeds the expected figures. It will be transferred to Costing Profit and Loss account.

2. Equivalent units: It is the conversion of incomplete production units into their equivalent completed units.
Equivalent completed units = Actual No. of units in process X % of work completed.

3. Process Costing Methods:
FIFO Method: Units completed and transferred are taken from both opening WIP and freshly introduced materials. Cost to complete the opening WIP and other completed units are calculated separately. Cost of opening WIP is added to cost incurred on completing the incomplete (WIP) units into complete one. The total cost of units completed and transferred is calculated by adding opening WIP cost to cost on freshly introduced inputs. Closing stock of WIP is valued at current cost.

Weighted Average Method: Cost of opening WIP and cost of current period are aggregated and the aggregate cost is divided by output in terms of completed units.

Theory Questions

Question 1.
Explain the “Equivalent Production.” [CA Inter Nov. 2013, 4 Marks]
Equivalent Production:
When opening and closing stocks of work-in-process exist, unit costs cannot be computed by simply dividing the total cost by total number of units still in process. We can convert the work-in-process units into finished units called equivalent production units so that the unit cost of these uncompleted (WIP) units can be obtained. Equivalent Production units = Actual number of units in production × Percentage of work completed. It consists of balance of work done on opening work-in-process, current production done fully and part of work done on closing WIP with regard to different elements of costs viz., ma-terial, labour and overhead.

Question 2.
Explain briefly the procedure for the valuation of Work-in-process. [CA Inter Nov. 2002, 2 Marks]
Valuation of Work-in process: The valuation of work-in-process can be made in the following three ways, depending upon the assumptions made regarding the flow of costs.

• First-in-first-out (FIFO) method
• Last-in-first-out (LIFO) method
• Average cost method

A brief account of the procedure followed for the valuation of work-in-process under the above three methods is as follows:

FIFO method: According to this method the units first entering the process are completed first. Thus the units completed during a period would consist partly of the units which were incomplete at the beginning of the period and partly of the units introduced during the period.
The cost of completed units is affected by the value of the opening inventory, which is based on the cost of the previous period. The closing inventory of work-in-process is valued at its current cost.

LIFO method: According to this method units last entering the process are to be completed first. The completed units will be shown at their current cost and the closing work-in-process will continue to appear at the cost of the opening inventory of work-in-progress along with current cost of work-in-progress if any.

Average cost method: According to this method opening inventory of work-inprocess and its costs are merged with the production and cost of the current period, respectively. An average cost per unit is determined by dividing the total cost by the total equivalent units, to ascertain the value of the units completed and units in process.

Question 3.
What is inter-process profit? State its advantages and disadvantages. [CA Inter Nov. 2012, 4 Marks]
In some process industries, the output of one process is transferred to the next process not at cost but at market value or cost plus a percentage of profit. The difference between cost and the transfer price is known as inter-process profits.

The advantages and disadvantages of using inter-process profit, in the case of process type industries are as follows:

• Comparison between the cost of output and its market price at the stage of completion is facilitated.
• Each process is made to stand by itself as to the profitability.

• The use of inter-process profits involves complication.
• The system shows profits which are not realised because of stock not sold out.

Question 4.
“Operation costing is defined as refinement of Process costing.” Explain it. [CA Inter May 2007, 3 Marks]
Operation costing is concerned with the determination of the cost of each operation rather than the process:

• In the industries where process consists of distinct operations, the operation costing method is applied.
• It offers better control and facilitates the computation of unit operation cost at the end of each operation.

Question 5.
What are the steps to be followed for preparing the production cost report which is prepared at the end of each accounting period? [ICAI Module]
Step-1: Analysis of physical flow’ of production units The first step is to determine and analyse the number of physical units in the form of inputs (introduced fresh or transferred from previous process, beginning WIP) and outputs (completed and WIP).

Step-2: Calculation of equivalent units for each cost elements
The second step is to calculate equivalent units of production for each cost element i.e. for material, labour and overheads.

Step-3: Determination of total cost for each cost element
Total cost for each cost element is collected and accumulated for the period.

Step-4: Computation of cost per equivalent unit for each cost element In this step, the cost per equivalent unit for each cost element is calculated by dividing the total cost determined in Step-3 by the equivalent units as deter-mined in Step-2.

Step-5: Assignment of total costs to units completed and ending WIP In this step, the total cost for units completed, units transferred to next process, ending WIP, abnormal loss etc. are calculated and posted in the process account and production cost report.

Practical Questions

Normal Loss, Abnormal Loss & Abnormal Gain

Question 1.
A product passes through Process-I and Process-II.
Particulars pertaining to the Process-I are:
Materials issued to Process-I amounted to ₹ 80,000, Wages ₹ 60,000 and manufacturing overheads were ₹ 52,500. Normal Loss anticipated was 5% of input, 9,650 units of output were produced and transferred out from Process-I to Process-II. Input raw materials issued to Process-I were 10,000 units.
There were no opening stocks.
Scrap has realizable value of ₹ 5 per unit.
You are required to prepare:
(i) Process-I Account
(ii) Abnormal Gain/Loss Account [CA Inter Dec. 2021, Nov. 2008, 5 Marks]
(i)

(ii)

Question 2.
A product passes through two processes. The output of Process I becomes the input of Process II and the output of Process II is transferred to warehouse. The quantity of raw materials introduced into Process I is 20,000 kg at 10 per kg. The cost and output data for the month under review are as under:

 Process I Process II Direct materials ₹ 60,000 ₹ 40,000 Direct labour ₹ 40,000 ₹ 30,000 Production overheads ₹ 39,000 ₹ 40,250 Normal loss: 8% 5% Output 18,000 171400 Loss realisation/Unit 2.00 3.00

The company’s policy is to fix the Selling price of the end product in such a way as to yield a Profit of 20% on Selling price.
Required:
(i) Prepare the Process Accounts
(ii) Determine the Selling price per unit of the end product. [CA Inter Nov. 2002, 9 Marks]
Process I Account

Process II Account

Working Notes:

1. Valuation of abnormal loss & units finished & transfer to process II A/c:
Total Expenditure incurred in the Process – Scrap realisation of normal loss
= Units introduced in the Process – Normal loss unit
= $$\frac{2,00,000+60,000+40,000+39,000-3,200}{20,000-1,600}$$
= $$\frac{3,35,800}{18,400}$$
= ₹ 18.25

2. Valuation of Abnormal gain & units finished & transfer to warehouse:

3. Determination of selling price per Unit of the end Product:
Uet the S.P. be ₹ 100
Profit = 20% of 100 = ₹ 20
Cost = ₹ 100 – ₹ 20 = ₹ 80
It the cost price is 25.5, the selling price of the end product
= $$\frac{25.50}{80}$$ × 100 = ₹ 31.875

Question 3.
Alpha Ltd. is engaged in the production of a product A which passes through 3 different process – Process P, Process 0 and Process R. The following data relating to cost and output is obtained from the books of account for the month of April 2021:

Production overheads of ₹ 90,000 were recovered as percentage of direct labour. 10,000 kg. of raw material @ ₹ 5 per kg. was issued to Process P. There was no stock of materials or work-in-process. The entire output of each process passes directly to the next process and finally to warehouse. There is normal wastage, in processing, of 10%. The scrap value of wastage is ₹ 1 per kg. The output of each process transferred to next process and finally to warehouse are as under:
Process P = 9,000 kg.
Process 0 = 8,200 kg.
Process R = 7,300 kg.
The company fixes selling price of the end product in such a way so as to yield a profit of 25% selling price.
Prepare Process P, Q and R accounts. Also calculate selling price per unit of end product. [CA Inter May 2018, 10 Marks]
Process P Account

Cost Per Unit:
= $$\frac{₹ 1,40,500-₹ 1,000}{10,000 \mathrm{kgs}-1,000 \mathrm{kgs}}$$
= $$\frac{₹ 1,39,500}{9,000 \mathrm{kgs}}$$
= ₹ 15.50

Process Q Account

Cost Per Unit:
= $$\frac{₹ 2,52,000-₹ 900}{9000 \mathrm{kgs}-900 \mathrm{kgs}}$$
= $$\frac{₹ 2,51,000}{8100 \mathrm{kgs}}$$
= ₹ 31

Process R Account

Cost per unit
= $$\frac{₹ 3,84,580 – ₹ 820}{8200 \mathrm{kgs}-820 \mathrm{kgs}}$$
= ₹ 52

Calculation of Selling Price:

 Cost per unit ₹ 52 Add: Profit 25% on selling price ie. 1/3rd of cost ₹ 17.33 Selling price per unit ₹ 69.33

Question 4.
A product passes through two processes A and B. During the year 2021, the input to process A of basic raw material was 8,000 units @ ₹ 9 per unit. Other information for the year is as follows:

 Process A Process B Output units 7,500 4,800 Normal loss (% to input) 5% 10% Scrap value per unit (₹) 2 10 Direct wages (₹) 12,000 24,000 Direct expenses (₹) 6,000 5,000 Selling price per unit (₹) 15 25

Total overheads ₹ 17,400 were recovered as percentage of direct wages. Selling expenses were ₹ 5,000. These are not allocated to the processes. 2/3rd of the output of Process A was passed on to the next process and the balance was sold. The entire output of Process B was sold.
Prepare Process A and B Accounts. [CA Inter May 2012, 8 Marks]
Process I Account

Cost of Abnormal Loss in Process A = $$\frac{95,800-800}{8,000-400}$$ = $$\frac{95,000}{7,600}$$ = ₹ 12.50 per unit

Process II Account

Cost of Abnormal gain = $$\frac{1,03,100-5,000}{5,000-500}$$ = $$\frac{98,100}{4,500}$$ = 21.80 per unit

Working Note:
Profit & Loss Account

Note:
1. As mentioned selling expenses are not allocable to process which is debited directly to the Profit & Loss A/c.
2. It is assumed that Process A and Process B are not responsibility centres and hence, Process A and Process B have not been credited to direct sales. P/L A/c is prepared to arriving at profit/loss.

Question 5.
M J Pvt. Ltd, produces a product “SKY” which passes through two processes, viz. Process A and Process B. The details for the year ending 31st March, 2021 are as follows:

 Process A Process B 40.000 Units introduced at a cost of ₹ 3,60,000 Material Consumed ₹ 2,42,000 ₹ 2,25,000 Direct Wages ₹ 2,58,000 ₹ 1,90,000 Manufacturing Expenses ₹ 196,000 ₹ 1,23,720 Output in Units 37,000 27,000 Normal Wastage of Inputs 5% 10% Input Scrap Value(per unit) ₹ 15 ₹ 20 Selling Price (per unit) ₹ 37 ₹ 61

(a) 80% of the output of Process A, was passed on to the next process and the balance was sold. The entire output of Process B was sold.
(b) Indirect expenses for the year was ₹ 4,48,080.
(c) It is assumed that Process A and Process B are not responsibility centre.
Required:
(i) Prepare Process A and Process B Account.
(ii) Prepare Profit & Loss Account showing the net profit/net loss for the year. [CA Inter May 2014, 8 Marks]
Process A A/c

Cost per unit = $$\frac{₹ 10,56,000-₹ 30,000}{₹ 40,000 \text { unit }-2,000 \text { units }}$$ = ₹
Normal wastage = 40,000 units × 5% = 2,000 units
Abnormal loss = 40,0000 units – (37,000 units + 2,000 units)
= 1,000 units
Transfer to Process B = 37,000 units × 80%
= 29,600 units
Sale = 37,000 units × 20%
= 7,400 units

Process B Account

Cost per unit = $$\frac{₹ 13,37,920-₹ 59,200}{₹ 29,600 \text { units }-2,960 \text { units }}$$ = ₹ 48 per unit
Normal wastage = 29,600 units × 10%
= 2,960 units
Abnormal gain = (27,000 units + 2,960 units) – 29,600 units
= 360 units

Profit & Loss Account

= 1,000 units
Transfer to Process B = 37,000 units × 80%
= 29,600 units
Sale = 37,000 units × 20%
= 7,400 units

Process B Account

Cost per unit = $$\frac{₹ 13,37,920-₹ 59,200}{₹ 29,600 \text { units }-2,960 \text { units }}$$ = ₹ 48 per unit
Normal wastage = 29,600 units × 10%
= 2,960 units
Abnormal gain = (27,000 units + 2,960 units) – 29,600 units
= 360 units

Profit & Loss Account

= 1,000 units
Transfer to Process B = 37,000 units × 80%
= 29,600 units
Sale = 37,000 units × 20%
= 7,400 units

Process B Account

Cost per unit = $$\frac{₹ 13,37,920-₹ 59,200}{₹ 29,600 \text { units }-2,960 \text { units }}$$ = ₹ 48 per unit
Normal wastage = 29,600 units × 10%
= 2,960 units
Abnormal gain = (27,000 units + 2,960 units) – 29,600 units
= – 360 units

Profit & Loss Account

Working notes:

Question 6.
JK Ltd. produces a product “AZE”, which passes through two processes, viz., process I and process II. The output of each process is treated as the raw material of the next process to which it is transferred and output of the second process is transferred to finished stock. The following data related to December, 2020:

 Process I Process II 25,000 units introduced at a cost of ₹ 2,00,000 – Material consumed ₹ 1,92,000 ₹ 96,200 Direct labour ₹ 2,24,000 ₹ 1,28,000 Manufacturing expenses ₹ 1,40,000 ₹ 60,000 Normal wastage of input 10% 10% Scrap value of normal wastage (per unit) ₹ 9.90 8.60 Output in Units 22,000 20,000

Required:
(i) Prepare Process I and Process II account.
(ii) Prepare Abnormal effective/wastage account as the case may be in each process. [CA Inter May 2008, 8 Marks]

Question 7.
PQR Ltd. processes a range of product including a toy ‘Alpha’, which passes through three processes before completion and transfer to the finished goods warehouse. The information relating to the month of October 2021 are as follows:

The production overhead is absorbed as a percentage of direct wages. There was no opening and closing stock.
Prepare the following accounts:
(i) Process-I
(ii) Process-II
(iii) Process-Ill
(iv) Abnormal Loss
(v) Abnormal Gain [CA Inter Nov 2019, 8 Marks]
(i)

Cost per unit = $$\frac{₹ 45,400-₹ 400}{2,000 \text { units – } 200 \text { units }}$$ = ₹ 25 Per unit

(ii) Process II Account

Cost per unit = $$\frac{₹ 87,860-₹ 460}{1,840 \text { units – } 92 \text { units }}$$ = ₹ 50 per unit

(iii) Process- III Account

Cost per unit = $$\frac{₹ 1,42,680-₹ 1,740}{1,740 \text { units – } 174 \text { units }}$$ = ₹ 90 per unit

(iv) Abnormal Loss Account

(v) Abnormal Gain Account

Question 8.
A product passes through two distinct processes before completion. Following information are available in this respect:

 Process 1 Process 2 Raw materials used 10,000 units – Raw material cost (per unit) ₹ 75 Transfer to next process/Finished good 9,000 units 8,200 units Normal loss (on inputs) 5% 10% Direct wages ₹ 3,00,000 ₹ 5,60,000 Direct expenses 50% of direct wages 65% of direct Manufacturing overheads 25% of direct wages 15% of direct wages Realisable value of scrap (per unit) ₹ 13.50 ₹ 145

8,000 units of finished goods were sold at a profit of 15% on cost. There was no opening and closing stock of work-in-progress.
Prepare:
(i) Process 1 and Process 2 Account
(ii) Finished goods Account
(iii) Normal Loss Account
(iv) Abnormal Loss Account
(v) Abnormal Gain Account [CA Inter Nov. 2019, 10 Marks]
Process 1 Account

Cost per unit of Completed units and abnormal loss:
= $$\frac{₹ 12,75,000-₹ 6,750}{10,000 \text { units }-500 \text { units }}$$
= $$\frac{₹ 12,68,250}{9,500 \text { units }}$$
= ₹ 133.50

Process 2 Account

Cost per unit of Completed units and abnormal loss:
= $$\frac{22,09,500-₹ 1,30,500}{9,000 \text { units }-900 \text { units }}$$
= $$\frac{₹ 20,79,000}{8,100 \text { units }}$$
= ₹ 256.67

Finished Goods Account

Equivalent Production: fifo Method

Question 9.
Following details have been provided by M/s AR Enterprises:
(i) Opening work-in-progress 3,000 units (70% complete)
(ii) Units introduced during the year 17,000 units
(in) Cost of the process (for the period) ₹ 33,12,720
(tv) Transferred to next process 15,000 units
(v) Closing work-in-progress 2,200 units (80% complete)
(vi) Normal loss is estimated at 12% of total input (including units in process in the beginning). Scraps realise ? 50 per unit. Scraps are 100% complete
Using FIFO method, compute:
(i) Equivalent production
(ii) Cost per equivalent unit [CA Inter Nov. 2018, 5 Marks]

Computation of cost per equivalent production unit:
Cost of the Process (for the period) = ₹ 33,12,720
Less: Scrap value of normal loss (₹ 50 × 2,400 units) = ₹ 1,20,000
Total process cost = ₹ 31,92,720
Cost per Equivalent unit = $$\frac{₹ 31,92,720}{15,060 \text { units }}$$

Question 10.
The following information relate to Process A:
(i) Opening WIP – 8,000 units at ₹ 75,000
(ii) Degree of Completion:
Material – 100%
(iii) Input 1,82,000 units at – ₹ 7,37,500
(iv) Wages paid – ₹ 3,40,600
(v) Overheads paid – ₹ 1,70,300
Units scrapped – 14,000
Degree of Completion:
Material – 100%
(vi) Closing WIP 18,000 units
Degree of Completion:
Material – 100%
(vii) Units completed and transferred 1,58,000 to next Process
(viii) Normal loss 5% of total input including opening WIP.
(ix) Scrap value is ₹ 5 per unit to be adjusted out of direct material cost You are required to compute on the basis of FIFO basis:
(i) Equivalent Production
(ii) Cost Per Unit
(iii) Value of Units transferred to next process. [CA Inter Nov, 2014, 8 Marks]
Statement of Equivalent Production
(FIFO Method)

Total cost per unit = ₹ (4.00 + 2.0106 + 1.0053) = ₹ 7.0159

Value of units transferred to next process:

Question 11.
The following information is furnished by ABC Company for Process II of its manufacturing activity for the month of April 2021:
(i) Opening Work-in-Progress-Nil
(ii) Units transferred from Process I – 55,000
(iii) Expenditure debited to Process II
Consumables – ₹ 1,57,200
Labour – ₹ 1,04,000
(iv) Units transferred to Process III – 51,000 units
(v) Closing WIP- 2,000 units (Degree of completion)
Consumables – 80%
Labour – 60%
(vi) Units scrapped – 2,000 units, scrapped units were sold at ₹ 5 per unit
(vii) Normal loss 4% of units introduced
You are required to:
(i) Prepare a Statement of Equivalent Production.
(ii) Determine the cost per unit.
(iii) Determine the value of Work-in-Process and units transferred to Process III. [CA Inter Nov. 2015, 8 Marks]
(i) Statement of Equivalent Production

(ii) Determination of Cost per Unit

(iii) Determination of value of Work-In-Process and units transferred to Process-III

Question 12.
From the following Information for the month ending October, 2021. Prepare Process 111 Cost Accounts:

 Opening WIP In Process III 1,800 units at ₹ 27,000 Transfer from Process II 47,700 units at ₹ 5,36,625 Transferred to Warehouse 43,200 units Closing WIP of Process III 4,500 units Units scrapped 1,800 units Direct material added in Process III ₹ 1,77,840 Direct Wages ₹ 87,840 Production overheads ₹ 43,920
 Degree of completion: Opening Stock Closing Stock Scrap Materials 80% 70% 100% Labour 60% 50% 70% Overheads 60% 50% 70%

The normal loss in the process was 5% of the production and scrap was sold @ ₹ 6.75 per unit. [CA Inter Nov. 2003, 10 Marks]
Statement of Equivalent Production:

Statement of cost per unit

Statement of Evaluation

Process III Account

Question 13.
From the following Information for the month ending October, 2020, prepare Process Cost accounts for Process III. Use First-in-first-out (FIFO) method to value equivalent production.
Direct materials added in Process III (Opening WIP) – 2,000 units at ₹ 25,750
Transfer from Process II – 53,000 units at ₹ 4,11,500
Transferred to Process IV – 48,000 units
Closing stock of Process III – 5,000 units
Units scrapped – 2,000 units
Direct material added in Process III – ₹ 1,97,600
Direct wages – ₹ 97,600

Degree of completion:

 Opening Stock Closing Stock Scrap Materials 80% 70% 100% Labour 60% 50% 70% Overheads 60% 50% 70%

The normal loss in the process was 5% of production and scrap was sold at ₹ 3 per unit. [CA Inter Nov. 2005, 14 Marks]
Process III Process Cost Sheet (FIFO Method) Period
Op. Stock: 2,000 units
Introduced: 53,000 units

Statement of Equivalent Production

Statement of Cost for each Element

Statement of Evaluation

Process III Account

Question 14.
A Company produces a component, which passes through two processes. During the month of April, 2021, materials for 40,000 components were put into Process I of which 30,000 were completed and transferred to Process II. Those not transferred to Process II were 100% complete as to materials cost and 50% complete as to labour and overheads cost. The Process I costs incurred were as follows:

 Direct Materials ₹ 15,000 Direct Wages ₹ 18,000 Factory Overheads ₹ 12,000

Of those transferred to Process II, 28,000units were completed and transferred to finished goods stores. There was a normal loss with no salvage value of 200 units in Process II. There were 1,800 units, remained unfinished in the process with 100% complete as to materials and 25% complete as regard to wages and overheads.
No further process material costs occur after introduction at the first process until the end of the second process, when protective packing is applied to the completed components. The process and packing costs incurred at the end of the Process II were:

 Direct Materials ₹ 4,000 Direct Wages ₹ 3,500 Factory Overheads ₹ 4,500

Required:
(i) Prepare Statement of Equivalent Production, Cost per unit and Process I A/c.
(ii) Prepare statement of Equivalent Production, Cost per unit and Process II A/c. [CA Inter May 2006, 10 Marks]
(i) Statement of Equivalent Production

Statement of Cost

Cost Analysis (Process I):
Finished and passed to next process

Process I Account

(ii) Statement of Equivalent Production

Total Cost per unit = 1.52159

Cost Analysis (Process II):

Process II Account:

Question 15.
XP Ltd. furnishes you the following information relating to process II.
Opening work-in-progress – NIL
Units introduced 42,000 units @ ₹ 12
Expenses debited to the process:
(a) Direct material ₹ 61,530
(b) Labour ₹ 88,820
Normal loss in the process = 2%.of input
Closing work-in-progress – 1,200 units

Degree of completion:
Materials – 100%
Labour – 50%
Finished output – 39,500 units

Degree of completion of abnormal loss:
Material – 100%
Labour – 80%
Units scraped as normal loss were sold at ₹ 4.50 per unit.
All the units of abnormal loss were sold at ₹ 9 per unit.
Prepare:
(a) Statement of equivalent production;
(b) Statement showing the cost of finished goods, abnormal loss and closing WIP;
(c) Process II account and abnormal loss account.
[CA Inter Nov. 2009, 8 Marks]
(a) Statement of Equivalent Production

(b) Statement of Cost

(c) Process II Account

Question 16.
Following information is available regarding Process A for the month of October 2020:
Production Record:

 (i) Opening work-in progress 40,000 Units (ii) (Material: 100% complete, 25% complete for labour & overheads) (iii) Units Introduced 1,80,000 Units (iv) Units Completed 1,50,000 Units (v) Units in process on 31.10.2020 (Material: 100% complete, 50% complete for labour & overheads) 70,000 Units

Cost Records:
Opening Work-in-progress

 Material ₹ 1,00,000 Labour ₹ 25,000 Overheads ₹ 45,000

Cost incurred during the month:

 Material ₹ 6,60,000 Labour ₹ 5,55,000 Overheads ₹ 9,25,000

Assure that FIFO method is used for W.I.P. inventory valuation.
Required:
(i) Statement of Equivalent Production.
(ii) Statement showing Cost for each element
(iii) Statement of apportionment of Cost
(iv) Process A Account. [CA Inter Nov. 2010, 8 Marks]
Statement of Equivalent Production
(FIFO Method)

Statement showing the Cost for each element

Statement of Evaluation

Process A A/c

Question 17.
ABX Company Ltd. provides the following information relating to Process B:
(i) Opening Work-in-progress – NIL
(ii) Units Introduced – 45,000 units @ ₹ 10 per unit
(iii) Expenses debited to the process
Direct material – ₹ 65,500
Labour – ₹ 90,800
(iv) Normal loss in the process – 2% of Input
(v) Work-in progress – 1,800 units
Degree of completion
Materials – 100%
Labour – 50%
(vi) Finished output – 42,000 units
(vii) Degree of completion of abnormal loss:
Direct material – 100%
Labour – 80%
(viii) Units scrapped as normal loss were sold at ₹ 5 per unit.
(ix) All the units of abnormal loss were sold at ₹ 2 per unit.
You are required to prepare:
(a) Statement of equivalent production.
(b) Statement showing the cost of finished goods, abnormal loss and closing balance of work-in-progress.
(c) Process-B account and abnormal loss account. [CA Inter May 2013, 10 Marks]

Question 18.
MNO Ltd. has provided following details:

• Opening work-in-progress is 10,000 units at ₹ 50,000 (Material 100%, Labour and overheads 70% complete).
• Input of materials is 55,000 units at ₹ 2,20,000. Amount spent on Labour and Overheads is ₹ 26,500 and ₹ 61,500 respectively.
• 9,500 units were scrapped; degree of completion for material 100% and for labour & overheads 60%.
• Closing work-in-progress is 12,000 units; degree of completion for material 100% and for labour & overheads 90%.
• Finished units transferred to next process are 43,500 units.

Normal loss is 5% of total input including opening work-in-progress. Scrapped units would fetch ₹ 8.50 per unit.
You are required to prepare using FIFO method:
(i) Statement of Equivalent production
(ii) Abnormal Loss Account [CA Inter January 2021, 5 Marks]
Statement of Equivalent Production (Using FIFO method)

Working Notes:

Equivalent Production: Weighted Average Method

Question 19.
The following details are available of Process X for August 2020:
Opening work-in-progress 8,000 units
Degree of completion and cost:

 Material (100%) ₹ 63,900 Labour (60%) ₹ 10,800 Overheads (60%) ₹ 5,400 Input 1,82,000 units at ₹ 7,56,900 Labour paid ₹ 3,28,000 Over heads incurred ₹ 1,64,000 Units scrapped 14,000

Degree of completion:

 Material 100% Labour and overhead 80% Closing work-in-process 18,000 units

Degree of completion

 Material 100% Labour and overhead 70%

1,58,000 units were completed and transferred to next process.
Normal loss is 8% of total input including opening work-in-process.
Scrap value is ₹ 8 per unit to be adjusted in direct material cost.
You are required to compute, assuming that average method of inventory is used:
(i) Equivalent production, and
(ii) Cost per unit [CA Inter Nov. 2011, 8 Marks]
(i) Statement of Equivalent Production

(ii) Statement of cost

Total cost per unit = ₹ 4 + ₹ 2 + ₹ 1 = ₹ 7.00

Question 20.
Following details are related to the work done in Process-I during the month of May 2021:
Opening work-in-process (3,000 units)

 Materials ₹ 1,80,500 Labour ₹ 32,400 Overheads ₹ 90,000 Materials introduced in Process-I (42,000 units) ₹ 36,04,000 Labour ₹ 4,50,000 Overheads ₹ 15,18,000 Units Scrapped 4,800 units

Degree of completion

 Materials 100% Labour & overhead 70% Closing Work-in-process 4,200 units

Degree of completion

 Materials 100% Labour & overhead 50%

Units finished and transferred to Process-II (36,000 units)
Normal loss:
4% of total input including opening work-in-process
Scrapped units fetch ₹ 62.50 per piece
Prepare:
(i) Statement of equivalent production.
(ii) Statement of cost per equivalent unit
(iii) Process-I A/c
(iv) Normal Loss Account and
(v) Abnormal Loss Account [CA Inter Nov. 2020, 10 Marks]
(i) Statement of Equivalent Production (Weighted Average method)

(ii) Statement showing cost for each element

(iii) Process-I Account

(iv) Normal Loss account

(v) Abnormal Loss Account

Question 21.
A product is manufactured in two sequential processes, namely Process-1 and Process-2. The following information relates to Process-1. At the beginning of June 2021, there were 1,000 WIP goods (60% completed in terms of conversion cost) in the inventory, which are valued at ₹ 2,86,020 (Material cost: ₹ 2,55,000 and Conversion cost: ₹ 31,020). Other information relating to Process-1 for the month of June 2021 is as follows:

 Cost of materials introduced-40,000 units (₹) 96,80,000 Conversion cost added (₹) 18,42,000 Transferred to Process 2 (Units) 35,000 Closing WIP (Units) (60% completed in terms of conversion cost) 1,500

100% of materials are introduced to Process-1 at the beginning.
Normal loss is estimated at 10% of input materials (excluding opening WIP).
Required:
(i) Prepare a statement of equivalent units using the weighted average cost method and thereby calculate the following.
(ii) Calculate the value of output transferred to Process-2 and closing WIP. [CA Inter Nov. 2019 RTP]
(i) Statement of Equivalent Production

(ii) Calculation of value of output transferred to Process-2 & Closing WIP

Working Note:
Cost for each element

Question 22.
ABC Limited manufactures a product ‘ZX’ by using the process namely RT. For the month of May, 2021, the following data are available:

Work-in-process:

 Process RT Material introduced (units) 16,000 Transfer to next process (units) 14,400 Work-in-process: At the beginning of the month (units) (4/5 completed) 4,000 At the end of the month (units) (2/3 completed) 3,000 Cost records: Work-in-process at the beginning of the month Material ₹ 30,000 Conversion cost ₹ 29,200 Cost during the month: materials ₹ 1,20,000 Conversion cost ₹ 1,60,800

Normal spoiled units are 10% of goods finished output transferred to next process.
Defects in these units are identified in their finished state. Material for the product is put in the process at the beginning of the cycle of operation, whereas labour and other indirect cost flow evenly over the year. It has no realizable value for spoiled units.
Required:
(i) Statement of equivalent production (Average cost method);
(ii) Statement of cost and distribution of cost;
(iii) Process accounts. [CA Inter Nov. 2007, 8 Marks]
Statement of equivalent production of Process RT

Statement of apportionment of cost:

Inter Process Profits

Question 23.
Pharma Limited produces product ‘Glucodin’ which passes through two processes before it is completed and transferred to finished stock. Following data relates to March, 2021.

Output of process I is transferred to process II at 25% profit on the transfer price, whereas output of process II is transferred to finished stock at 20% on transfer price. Stock in processes are valued at prime cost. Finished stock is valued at the price at which it is received from process II. Sales for the month is ₹ 28,00,000.
You are required to prepare Proce$s*I a/c, Process-II a/c, and Finished Stock a/c showing the profit element at each stage. [CA Inter May 2019, May 2010, 10 Marks] Answer: Process I Account Process II Account Working Note: Profit element in closing stock = $$\frac{3,00,000}{18,00,000}$$ × 90,000 = ₹ 15,000 Finished Stock Account Working Note: Profit element in closing finished Stock = $$\frac{9,00,000}{27,00,000}$$ × 2,25,000 = ₹ 75,000 Calculation of Profit on Sale: Question 24. ABC Ltd. produces an item which is completed in three processes – X, Y and Z. The following information is furnished for process X for the month of March, 2021: Opening work-in-progress (5,000 units):  Materials ₹ 35,000 Labour ₹ 13,000 Overheads ₹ 25,000 Units introduced into process X (55,000 units):  Materials ₹ 20,20,000 Labour ₹ 8,00,000 Overheads ₹ 13,30,000 Units scrapped: 5,000 units Degree of completion:  Materials 100% Labour & Overheads 60% Closing work-in-progress (5,000 units): Degree of completion:  Materials 100% Labour & Overheads 60% Units finished and transferred to Process Y: 50,000 units Normal loss: 5% of total input (including opening works-in-progress). Scrapped units fetch ₹ 20 per unit. Presuming that average method of inventory is used, prepare (i) Statement of Equivalent production (ii) Statement of Cost for each element (iii) Statement of distribution of cost (iv) Abnormal loss account [CA Inter May 2018, 8 Marks] Answer: (i) Statement of Equivalent Production (ii) Statement of Cost for each element (iii) Statement of Distribution of Cost (iv) Abnormal Loss Account Question 25. KMR Ltd. produces product AY, which passes through three processes ‘XM’, ‘YM’ and ‘ZM\ The output of process ‘XM’ and ‘YM’ Is transferred to next process at cost plus 20 per cent each on transfer price and the output of process ‘ZM’ is transferred to finished stock at a profit of 25 per cent on transfer price. The following information are available in respect of the year ending 31st March, 2021: Stock in processes is valued at prime cost. The finished stock is valued at the price at which it is received from process ‘ZM*. Sales of the finished stock during the period was ₹ 28,00,000. You are required to prepare: (i) All process accounts and (ii) Finished stock account showing profit element at each stage. [CA Inter May 2017, 8 Marks] Answer: Process ‘XM’ Account Process ‘YM’ Account Process ‘ZM’ Account Miscellaneous Question 26. RST Ltd. manufactures Plastic moulded Chair. Three models of moulded chairs, all variation of the same design are Standard, Deluxe and Executive. The Company uses an Operation Costing system, RST Ltd. has Extrusion, Form, Trim and Finish Operations. Plastic Sheets are produced by the Extrusion Operation. During the Forming Operation, the Plastic Sheets are moulded into Chair Seats and the legs are added. The Standard Model is sold after this operation. During the Trim Operation, the arms are added to the Deluxe and Executive Models, and the chair edges are smoothed. Only the Executive Model enters the Finish Operation, in which padding is added. All of the units produced receive the same steps within each operation. In April, units of production and Direct Materials Cost incurred are as follows: The total Conversion Costs for the month of April, are: Required: 1. For each product produced by RST Ltd. during April, determine the Unit Cost and the Total Cost. 2. Now consider the following information for May. All unit costs in May are identical to the April unit cost calculated as above in (1). At the end of May, 1,500 units of the Deluxe Model remain in Work-in-Progress. These units are 100% complete as to Materials and 65% complete in the Trim Operation. Determine the cost of the Deluxe Model Work-in Process inventory at the end of May. [CA Inter May 2003] Answer: 1. Computation of Cost per Equivalent Unit for each Operation 2. Computation of Total and Unit Model 3. Valuation of WIP Inventory (1,500 units of Deluxe Model) Question 27. A Chemical Company carries on production operation in two processes. The material first pass through Process I, where Product ‘A’ is produced. Following data are given for the month just ended:  Material input quantity 2,00,000 kgs Opening work-in-progress quantity (Material 100% and conversion 50% complete) 40,000 kgs Work completed quantity- 1,60,000 kgs Closing work-in-progress quantity (Material 100% and conversion two-third complete) 30,000 kgs Material input cost ₹ 75,000 Processing cost ₹ 1,02,000 Opening work-in-progress cost ₹ 20,000 Material cost Processing cost ₹ 12,000 Normal process loss in quantity may be assumed to be 20% of material input. It has no realisable value. Any quantity of Product ‘A’ can be sold for ₹ 1.60 per kg. Alternatively, it can be transferred to Process II for further processing and then sold as Product ‘AX’ for 12 per kg. Further materials are added in Process II, which yield two kgs. of Product ‘AX’ for every kg. of Product ‘A’ of Process I. Of the 1,60,000 kgs. per month of work completed in Process I, 40,000 kgs are sold as Product ‘A’ and 1,20,000 kgs. are passed through Process II for sale as Product ‘AX’. Process II has facilities to handle upto 1,60,000 kgs. of Product ‘A’ per month, if required. The monthly costs incurred in Process II (other than the cost of Product ‘A’) are:  1,20,000 kgs. of Product ‘A’ input 1,60,000 kgs. of Product ‘A’ input Materials Cost ₹ 1,32,000 ₹ 1,76,000 Processing Costs ₹ 1,20,000 ₹ 1,40,000 Required: (i) Determine, using the weighted average cost method, the cost per kg. of Product ‘A’ in Process I and value of both work completed and closing work-in-progress for the month just ended. (ii) Is it worthwhile processing 1,20,000 kgs. of Product ‘A’ further? (iii) Calculate the minimum acceptable selling price per kg., if a potential buyer could be found for additional output of Product ‘AX’ that could be produced with the remaining Product ‘A’ quantity. [CA Inter Nov. 2006, 14 Marks] Answer: Statement of equivalent production: (i) Calculation of cost of equivalent production Cost per kg of product A (₹ 0.475 + ₹ 0.600) = ₹ 1.075 per unit Value of work completed (1,60,000 × 1.075) = ₹ 1,72,000 Value of closing W.I.P (30,000 × 0.475) = 14,250 (20,000 × 0.600) = 12,000 14,250 + 12,000 = 26,250 (ii) Evaluation of further processing of 1,20,000 kg. of Product A:  (2,40,000 kg. of product AX produced) ₹ Cost in process-I (1,20,000 × 1.60) 1,92,000 Material 1,32,000 Processing Cost 1,20,000 Cost of processing of product AX 4,44,000 Sales value (2,40,000 × 2) 4,80,000 Net gain 36,000 (iii) Cost of processing of 40,000 kg. of Product A: Question 28. A Manufacturing unit manufactures a product ‘XYZ’ which passes through three distinct Processes-X, Y and Z. The following data is given:  Process X Process Y Process Z Material consumed (in ₹) 2,600 2,250 2,000 Direct wages (in ₹) 4,000 3500 3000 • The total Production Overhead of ₹ 15,750 was recovered @150% of direct wages. • 15,000 units at ₹ 2 each were introduced to Process “X”. • The output of each process passes to the next process and finally, 12,000 units were transferred to Finished Stock Account from Process “Z”. • No stock of materials or work-in-progress was left at the end. The following additional information is given:  Process % of wastage to normal input Value of Scrapper unit(₹) X 6% 1.10 Y ? 2.00 Z 5% 1.00 You are required to: (i) Find out the percentage of wastage in process ‘Y’, given that the output of Process ‘Y’ is transferred to Process ‘Z’ at ₹ 4 per unit. (ii) Prepare Process accounts for all the three processes X, Y and Z. [CA Inter July, 2021, 10 Marks] Answer: (i) Calculation of percentage of wastage in process Y Let assume x be the unit of normal loss in process Y Cost per unit in process Y = $$\frac{\text { Total cost }- \text { Sale of scrap }}{\text { Total units }- \text { Normal loss units }}$$ = $$\frac{₹ 52,610-2 x}{14,100-x}$$ Output of Process Y is transferred to Process Z at ₹ 4 per unit. Therefore, per unit cost in Process Y = ₹ 4. 4 = $$\frac{₹ 52,610-2 x}{14,100-x}$$ 4(14,100 – x) = 52,610 – 2x 56,400 – 4x = 52,610 – 2x 3,790 = 2x x = $$\frac{3,790}{2}$$ = 1,895 units Percentage of wastage = $$\frac{1,895 \text { units }}{14,100 \text { units }}$$ units × 100 = 13.44% (ii) Process X Account Process Y Account Process Z Account Cost per unit = $$\frac{\text { Total cost }- \text { Sale of scrap }}{\text { Total units – Normal loss units }}$$ = $$\frac{₹ 58,320-₹ 610}{12,205-610}$$ = ₹ 4.977 per unit Question 29. The following information is given in respect of Process No, 3 for the month of January, 2021, Opening stock – 2,000 units made-up of:  Direct Materials-I ₹ 12,350 Direct Materials-II ₹ 13,200 Direct Labour ₹ 17,500 Overheads ₹ 11,000 Transferred from Process No. 2: 20,000 units @6.00 per unit. Transferred to Process No. 4:17,000 units. Expenditure incurred in Process No. 3  Direct Materials ₹ 30,000 Direct Labour ₹ 60,000 Overheads ₹ 60,000 Scrap: 1,000 units-Direct Materials 100%, Direct Labour 60%, Overheads 40% Normal Loss 10% of production. Scrapped units realised ₹ 4 per unit. Closing Stock:4,000 units-Degree of completion: Direct Materials 80%, Direct Labour 60% and overheads 40%, Prepare Process No. 3 Account using average price method, along with necessary supporting statements. [CA Inter May 2001,10 Marks] Answer: Process 3 Account Working Note: Statement of Equivalent Production (Average cost method) Working Note: Normal loss given is 10% of production. Here production there fore means those units which come upto the state of inspection. In that case, opening stock plus receipts minus closing stock of WIP will represent units of production (2,000 units + 20,000 units-4,000 units). In such case, the units of production comes to 18,000 units and hence 1,800 units as normal loss units. Question 30. Star Ltd. manufactures chemical solutions for the food processing industry. The manufacturing takes place in a number of processes and the company uses FIFO method to value work-in-process and finished goods. At the end of the last month, a fire occurred in the factory and destroyed some of papers containing records of the process operations for the month. Star Ltd. needs your help to prepare the process accounts for the month during which the fire occurred. You have been able to gather some information about the month’s operating activities but some of the information could not be retrieved due to the damage. The following information was salvaged: • Opening work-in-process at the beginning of the month was 1,600 litres, 70% complete for labour and 60% complete for overheads. Opening work-in-process was valued at ₹ 1,06,560. • Closing work-in-process at the end of the month was 320 litres, 30% complete for labour and 20% complete for overheads. • Normal loss is 10% of input and total losses during the month were 1,200 litres partly due to the fire damage. • Output sent to finished goods warehouse was 8,400 litres. • Losses have a scrap value of ₹ 15 per litre. • All raw materials are added at the commencement of the process. • The cost per equivalent unit (litre) is ₹ 78 for the month made up as follows:  ₹ Raw Material 46 Labour 14 Overheads 18 78 Required: (i) CALCULATE the quantity (in litres) of raw material inputs during the month. (ii) CALCULATE the quantity (in litres) of normal loss expected from the process and the quantity (in litres) of abnormal loss/ gain experienced in the month. (iii) CALCULATE the values of raw material, labour and overheads added to the process during the month. (iv) PREPARE the process account for the month. [CA Inter May 2020 RTP] Answer: (i) Calculation of Raw Material inputs during the month: (ii) Calculation of Normal Loss and Abnormal Loss/Gain  Litres Total process losses for month 1,200 Normal Loss (10% input) 832 Abnormal Loss (balancing figure) 368 (iii) Calculation of values of Raw Material, Labour and Overheads added to the process Workings: Statement of Equivalent Units (litre) (iv) Process Account for the month [(320 × ₹ 46) + (320 × 0.30 × ₹ 14) + (320 × 0.20 × 18)] = 17,216 Question 31. M Ltd. produces a product-X, which passes through three processes, I, II and III. In Process-Ill a by-product arises, which after further processing at a cost of 185 per unit, product Z is produced. The information related for the month of August 2020 is as follows: Production overhead for the month is ₹ 2,88,000, which is absorbed as a percentage of direct wages. The scraps are sold at ₹ 10 per unit. Product-Z can be sold at ₹ 135 per unit with a selling cost of ₹ 15 per unit No. of units produced: Process-I – 6,600; Process-II – 5,200, Process-III – 4,800 and Product-Z – 600 There is not stock at the beginning and end of the month You are required to PREPARE accounts for: (i) Processes-I, II and III (ii) By-product process. [CA Inter Nov. 2020 RTP] Answer: Process-I Account = $$\frac{3,42,000-3,500}{7,000-350}$$ = ₹ 50.9022 Process-II Account = $$\frac{₹ 6,49,955-6,600}{6,600-660 \text { units }}$$ = ₹ 108.3089 Process-III Account = $$\frac{(8,05,406-2,600-21,000)}{(5,200-260-600 \text { units })}$$ = ₹ 180.1396 Realisable value = ₹ 135 – (85 + 15) = ₹ 35 By-Product Process Account Question 32. TheM-Tech Manufacturing Company is presently evaluating two possible processes for the manufacture of a toy. The following information is available:  Process A (₹) Process B (₹) Variable cost per unit 12 14 Sales price per unit 20 20 Total fixed costs per year 30,00,000 21,00,000 Capacity (in units) 4,30,000 5,00,000 Anticipated sales (Next year, in units) 4,00,000 4,00,000 Suggest: 1. Which process should be chosen? 2. Would you change your answer as given above, if you were informed that the capacities of the two processes are as follows: A – 6,00,000 units; B – 5,00,000 units? Why? [CA Inter May 2016, 4 Marks] Answer: (1) Comparative Profitability Statements Process-B should be chosen as it gives more profit. (2) Process-A be chosen. ‘Note: It is assumed that capacity produced equals sales. ## Joint Products and By Products – CA Inter Costing Study Material Joint Products and By Products – CA Inter Cost and Management Accounting Study Material is designed strictly as per the latest syllabus and exam pattern. ## Joint Products and By Products – CA Inter Costing Study Material Question 1. Narrate the terms ‘Joint Products’ and ‘By-Products’ with an example of each term. [CA Inter Dec. 2021, 5 Marks] Answer: Joint Products: Joint products represent two or more products separated in the course of the same processing operation usually requiring further processing, each product being in such proportion that no single product can be designated as a major product. Example: In the oil industry, gasoline, fuel oil, lubricants, paraffin, coal tar, asphalt and kerosene are all produced from crude petroleum. These are known as joint products. By-Products: These are defined as products recovered from material discarded in a main process, or from the production of some major products, where the material value is to be considered at the time of severance from the main product.” Thus by-products emerge as a result of processing operation of another product or they are produced from the scrap or waste of materials of a process. Examples: Molasses in the manufacture of sugar, tar, ammonia and benzole obtained on carbonization of coal and glycerin obtained in the manufacture of soap. Question 2. Describe briefly, hew joint costs up to the point of separation may be apportioned amongst the joint products under the following methods: (i) Average unit cost method (ii) Contribution margin method (iii) Market value at the point of separation (iv) Market value after further processing (v) Net realizable value method [CA Inter May 2009, Nov. 2010, 9 Marks] Answer: Methods of apportioning joint cost among the joint products: (i) Average Unit Cost Method: Under this method, total process cost (upto the point of separation) is divided by total units of joint products produced. On division average cost per unit of production is obtained. The effect of application of this method is that all joint products will have uniform cost per unit. (ii) Contribution Margin Method: Under this method, joint costs are segre-gated into two parts – variable and fixed. The variable costs are apportioned over the joint products on the basis of units produced (average method) or physical quantities. If the products are further processed, then all variable cost incurred be added to the variable cost determined earlier. Then contribution is calculated by deducting variable cost from their respective sales values. The fixed costs are then apportioned over the joint products on the basis of contribution ratios. (iii) Market Value at the Time of Separation: This method is used for apportioning joint costs to joint products up to the split off point. It is difficult to apply if the market value of the products at the point of separation is not available. It is a useful method where further processing costs are incurred disproportionately. To determine the apportionment of joint costs over joint products, a factor known as multiplying factor is determined. This multiplying factor on multiplication with the sales values of each joint product gives rise to the proportion of joint cost. (iv) Market Value after further Processing: Here the basis of apportionment of joint costs is the total sales value of finished products at the further processing. The use of this method is unfair where further processing costs after the point of separation are disproportionate or when all the joint products are not subjected to further processing. (v) Net Realisable Value Method: Here joint costs is apportioned on the basis of net realisable value of the joint products, Net Realisable Value = Sale value of joint products (at finished stage) (-) Estimated profit margin (-) Selling & distribution expenses, if any (-) Post split-off cost Question 3. Discuss the Net Realisable Value (NRV) method of apportioning joint costs to by-products. [CA Inter MTP] Answer: The realisation on the disposal of the by-product may be deducted from the total cost of production so as to arrive at the cost of the main product. For example, the amount realised by the sale of molasses in a sugar factory goes to reduce the cost of sugar produced in the factory. When the by-product requires some additional processing and expenses are incurred in making it saleable to the best advantage of the concern, the expenses so incurred should be deducted from the total value realised from the sale of the by-product and only the net realisations should be deducted from the total cost of production to arrive at the cost of production of the main product. Separate accounts should be maintained for collecting additional expenses incurred on: • Further processing of the by-product, and • Selling, distribution and administration expenses attributable to the by-product Question 4. How are By-products treated in Costing? [CA Inter Nov. 2018, 5 Marks] Answer: Treatment of by-product cost in Cost Accounting: (a) When they are of small total value: When the by-products are of small total value, the amount realised from their sale may be dealt in any one the following two ways: 1. The sales value of the by-products may be credited to the Cost-ing Profit and Loss Account and no credit be given in the Cost Accounts. The credit to the Costing Profit and Loss Account here is treated either as miscellaneous income or as additional sales revenue. 2. The sale proceeds of the by-product may be treated as deductions from the total costs. The sale proceeds in fact should be deducted either from the production cost or from the cost of sales. (b) When the by-products are of considerable total value: Where by-products are of considerable total value, they may be regarded as joint products rather than as by- products. To determine exact cost of by-products the costs incurred upto the point of separation, should be apportioned over by-products and joint products by using a logical basis. (c) Where they require further processing: In this case, the net realisable value of the by-product at the split-off point may be arrived at by subtracting the further processing cost from the realisable value of by-products. Question 5. Distinguish between Joint Products and By-Products. [ICAI Module] Answer: Difference between Joint Products and By-Products.  Joint Products By-Products Joint products are of equal importance. By-Products are of small economic value. They are produced simultaneously. They are produced incidentally in addition to the main products. Practical Questions Question 1. A factory produces two products, ‘A’ and ‘B’ from a single process. The joint processing costs during a particular month are:  Direct Material ₹ 30,000 Direct Labour ₹ 9,600 Variable Overheads ₹ 12,000 Fixed Overheads ₹ 32,000 Sales: A – 100 units @ ₹ 600 per unit; B – 120 units @ ₹ 200 per unit. Apportion joints costs on the basis of: (i) Physical Quantity of each product (ii) Contribution Margin method, and (iii) Determine Profit or Loss under both the methods. [CA Inter Nov. 2019, 5 Marks] Answer: Total Joint Cost  ₹ Direct Material 30,000 Direct Labour 9,600 Variable Overheads 12,000 Total Variable Cost 51,600 Fixed Overheads 32,000 Total joint cost 83,600 Apportionment of Joint Costs: Note: The fixed cost of ₹ 32,000 is to be apportioned over the joint products A and B in the ratio of their contribution margin but contribution margin of Product B is Negative so fixed cost will be charged to Product A only. Question 2. A company’s plant processes 6,750 units of a raw material in a month to produce two products ‘M’ and ‘N’. The process yield is as under:  Product M 80% Product N 12% Process Loss 8% The cost of raw material is ₹ 80 per unit. Processing cost is ₹ 2.25.000 of which labour cost is accounted for 66%. Labour is chargeable to products ‘M’ and ‘N’ in the raiio of 100:80. Prepare a Comprehensive Cost Statement for each product showing: (i) Apportionment of joint cost among products M’ and ‘N’ and (hi) Total cost of the products ‘M’ and ‘N’. [CA Inter Nov. 2020, 5 Marks] Answer: Comprehensive Cost Statement Note: No. of units produced of Product M = 6750 units × 80% = 5400 units No. of units produced of Product N = 6750 units × 12% = 810 units Question 3. Mayura Chemicals Ltd. buys a particular raw material at ₹ 8 per litre. At the end of the processing in Department- 1, this raw material splits-off into products X, Y and Z. Product X is sold at the split-off point, with no further processing. Products Y and Z require further processing before they can be sold. Product Y is processed in Department-2, and Product Z is processed in Department-3. Following is a summary of the costs and other related data for the year 2020-21: There were no opening and closing inventories of basic raw’ materials at the beginning as well as at the end of the year. All finished goods inventory in litres was complete as to processing. The company uses the Net-realisable value method of allocating joint costs. You are required to prepare; (i) Schedule showing the allocation of joini costs (ii) Calculate the Cost of goods sold of each product and the cost of each Item; In Inventory. (iii) A comparative statement of Gross profit. [CA Inter January 2021, 10 Marks] Answer: (i) Statement of Joint Costs allocation of inventories of X, Y and Z (ii) Calculation of Cost of goods sold and Closing inventory (iii) Comparative Statement of Gross Profit: Working Notes: 1. Total production of three products for the year 2020-21 2. Joint cost apportioned to each product Question 4. A Factory is engaged in the production of chemical Bomex and in the course of its manufacture a by-product Cromex is produced which after further processing has a commercial value. For the month of April 2021 the following are the summarised cost data: The factory uses net realisable value method for apportionment of joint cost So by products, You are required to prepare-statements- showing: (i) Joint cost allocable to Cromex (ii) Product wise and overall profitability of the factory for April 2021, [CA Intel May 2019, 5 Marks] Answer: (i) Statement Showing Joint Cost Allocation to ‘Cromex’  ₹ Sales (₹ 40 × 2,000 units) 80,000 Less: Post Split Off Costs (4,000 + 18,000 + 6,000) (28,000) Less: Estimated Profit (₹ 5 × 2,000 units) (10,000) Joint cost allocable 42,000 (ii) Statement Showing Product Wise and Overall Profitability  Bomex (₹) Cromex (₹) Total (₹) Sales Less: Share in Joint Expenses Less: Post Split Off Costs Profit 2,00,000 (1,38,000) (36,000) 80,000 (42.000) (28.000) 2,80,000 (1,80,000) (64,000) 26,000 10,000 36,000 Note: Share in Joint Expenses For Bomex = ₹ 1,80,000 – ₹ 42,000 = ₹ 1,38,000 Treatment of By-Product Cost Question 5. A company manufactures one main product (M1) and two by-products B1 and B2. For the month of January 2021, following details are available: There are no beginning or closing inventories. Prepare statement showing: (i) Allocation of joint cost; and (ii) Product-wise and overall profitability of the company for January [CA Intel May 2013, May 2015, 8 Marks] Answer: Statement showing allocation of Joint Cost Statement of Profitability Question 6. A Ltd. produces ‘M’ as a main product and gets two by products – ‘P’ and ‘O’ in the course of processing. Following information are available for the month of October, 2020: The joint cost of manufacture up to separation point amounts to ₹ 2,50,000. Selling expenses amounting to ₹ 85,000 are to be apportioned to the three products in the ratio of sales units. There is no opening and closing stock. Prepare the statement showing: (i) Allocation of joint cost (ii) Product wise overall profitability and (iii) Advise the company regarding results if the by product ‘P’ is not further processed and is sold at the point of separation at ₹ 60 per unit without incurring selling expenses. [CA Inter Nov. 2017, 8 marks] Answer: (i) Statement showing allocation of Joint Cost  ₹ ₹ No. of units Produced 2,500 1,500 Selling Price Per unit (₹) 80 50 Sales Value (₹) 2,00,000 75,000 Less: Estimated Profit (P – 30% & Q – 25%) (60,000) (18,750) Cost of Sales 1,40,000 56,250 Less: Selling Expenses (Refer W.N.l) (25,000) (15,000) Cost of Production 1,15,000 41,250 Less: Cost after separation (60,000) (30,000) Joint Cost allocated 55,000 11,250 (ii) Statement of Profitability (iii) If the by-product P is not further processed and is sold at the point of separation:  ₹ Sales value at the point of separation (2,500 units × ₹ 60) 1,50,000 Less: Joint cost 55,000 Profit 95,000 Profit after further processing 60,000 Incremental Profit . 35,000 If the by-product P is sold at the point of separation, it will give an additional profit of ₹ 35,000 to the company, hence, the company should sell by-product P without further processing. Working Note: Calculation of Selling and Distribution Expenses Selling and Distribution expenses for M = ₹ 85,000 – ₹ 23,000 – ₹ 15,000 = ₹ 45,000 Question 7. A factory producing article A also produces a by product B which is further processed into finished product. The joint cost of manufacture is given below: Subsequent cost in ₹ are given below: Selling prices are A ₹ 16,000 B ₹ 8.000 Estimated profit on selling prices is 25% for A and 20% for B. Assume that selling and distribution expenses are in proportion of sales prices. Show how you would apportion joint costs of manufacture and prepare a statement showing cost of production of A and B. [CA Inter Ma\ 2016 8 Marks] Answer: Apportionment of Joint Costs  A (₹) B (₹) Total (₹) Joint costs 6,733 3,267 10,000 Add: Subsequent cost 5,000 3,000 8,000 Cost of production 11,733 6,267 18,000 Working Note: Calculation of Selling and Distribution Expenses Question 8. ABC Ltd. operates a simple chemical process to convert a single material into three separate items, referred to here as X, Y and Z. All three end products are separated simultaneously at a single split-off point. Products X and Y are ready for sale immediately upon split off without further processing or any other additional costs. Product Z, however, is processed further before being sold. There is no available market price for Z at the split-off point. The selling prices quoted here are expected to remain the same in the coming year. During 2019-20, the selling prices of the items and the total amounts sold were: X – 186 tons sold for ₹ 3,000 per ton Y – 527 tons sold for ₹ 2,250 per ton Z – 736 tons sold for ₹ 1,500 per ton The total joint manufacturing costs for the year were ₹ 12,50,000. An additional ₹ 6,20,000 was spent to finish product Z. There were no opening inventories of X, Y or Z at the end of the year. The following inventories of complete units were on hand:  X 180 tons Y 60 tons Z 25 tons There was no opening or closing work-in-progress. Required: Compute the cost of inventories of X, Y and Z and cost of goods sold for year ended on March 31, 2020, using Net Realizable Value (NRV) method of Joint Cost allocation. [CA Inter Nov. 2020 RTP] Answer: Statement of Joint Cost allocation of inventories of X, Y and Z (By using Net Realisable Value Method) Cost of goods sold as on March 31, 2020 (By using Net Realisable Value Method) Working Notes: 1. Total production of three products for the year 2019-2020 2. Joint cost apportioned to each product: Question 9. A Company produces two joint products P and 0 in 70: 30 ratio from basic raw materials in department A. The input/output ratio of department A is 100: 85. Product P can be sold at the split of stage or can be processed further at department B and sold as product AR. The input/output ratio is 100: 90 of department B. The department B is created to process product P only and to make it product AR. The selling prices per kg. are as under:  Product P ₹ 85 Product 0 ₹ 290 Product AR ₹ 115 The production will be taken up in the next month. Raw materials 8,00,000 Kgs. Purchase price ₹ 80 per Kg.  Dept. A ₹ lacs Dept. B ₹ lacs Direct materials 35.00 5.00 Direct labour 30.00 9.00 Variable overheads 45,00 18.00 Fixed overheads 40.00 32.00 Total 150.00 64.00  Selling Expenses: ₹ in lakhs Product P 24.60 Product 0 21.60 Product AR 16.80 Required: (i) Prepare a statement show ing the apportionment of joint costs (ii) State whether it is advisable to produce product AR or not. [CA Inter May 2007, 8 Marks] Answer: Input in Dept. ‘A’ 8,00,000 kgs. Yield 85% Therefore Output = 85% of 8,00,000 = 6,80,000 kgs Ratio of output for P and Q = 70: 30 Product of P – 70% of 6,80,000 = 4,76,000 kgs. Product of Q = 30% of 6,80,000 = 2,04,000 kgs. (i) Statement showing apportionment of joint cost  ₹ in lakhs Raw materials (8,00,000 kgs. × ₹ 80) 640 Process cost of department ‘A’ 150 790 Apportionment of Joint Cost (In the ratio of Net Sales i.e. P : Q, 40% : 60%)  Joint Cost of ‘P’ ₹ 316 lakhs Joint Cost of ‘Q’ ₹ 474 lakhs (ii) Statement showing the profitability of further processing of product ‘P’ and converted into product ‘AR’ If ‘P’ is not processed, profitability is as under.  ₹ in lakhs Sales Less: Joint expense 380.00 316.00 Profit 64.00 Further processing of product ‘P’ and converting into product ‘AR’ is beneficial to the company because the profit increase by ₹ 31.86 lakhs (₹ 95.86 lakhs – ₹ 64.00 lakhs). Question 10. A company produces two joint products X and Y, from the same basic materials. The processing is completed in three departments. Materials are mixed in Department I. At the end of this process X and Y get separated. After separation X is completed in the Department II and Y is finished in Department III. During a period 2,00,000 kg. of raw material were processed in Department I, at a total cost of ₹ 8,75,000, and the resultant 60% becomes X and 30% becomes Y and 10% normally lost in processing. In Department II1 /6th of the quantity received from Department I is lost in processing. X is further processed in Department II at a cost of ₹ 1,80,000. In Department III further new material added to the material received from Department I and weight mixture is doubled, there is no quantity loss in the department. Further processing cost (with material cost) in Department III is ₹ 1,50,000. The details of sales during the year are:  Product X Product Y Quantity sold (kg.) 90,000 1,15,000 Sales price per kg (₹) 10 4 There were no opening stocks. If these products sold at split-off-point, the selling price of X and Y wouid be ₹ 8 and ₹ 4 per kg respectively. Required: (i) Prepare a statement showing the apportionment of joint cost to X and Y in proportion of sales value at split off point. (ii) Prepare a statement showing the cost per kg of each product indicating joint cost, processing cost and total cost separately. (iii) Prepare a statement showing the product wise profit for the year. (iv) On the basis of profits before and after further processing of product X and Y, give your comment that products should be further processed or not. [CA Inter May 2005, 9 Marks] Answer: Calculation of quantity produced (i) Statement of apportionment of joint cost (ii) Statement of cost per kg  Product X Product Y Output (kg) 1,00,000 1,20,000 Share in joint cost (₹) 7,00,000 1,75,000 Further processing cost (₹) 1,80,000 1,50,000 Total Cost 8,80,000 3,25,000 Total cost per kg (₹) 8.80 2.708 (iii) Statement of profit  Product X Product Y Output (kg) 1,00,000 1,20,000 Sales (kg) 90,000 1,15,000 Closing stock 10,000 5,000 ₹ ₹ Sales @ ₹ 10 and ₹ 4 for product X and Y respectively 9,00,000 4,60,000 Add: Closing stock (kg) (at full cost) 88,000 13,540 Value of production 9,88,000 4,73,540 Less: Share in joint cost 7,00,000 1,75,000 Further processing 1,80,000 1,50,000 Profit 1,08,000 1,48,540 (iv) Profitability statement, before and after processing (assuming all units sold) Product X should be sold at split off point and product Y after processing because of higher profitability. Question 11. In a chemical manufacturing company, three products A, B and C emerge at a single split off stage in department P. Product A is further processed in department 0, product B in department R and product C in department S. There is no loss in further Processing of any of the three products. The cost data for a month are as under:  Cost of raw materials introduced in department P ₹ 12,68.800 Direct Wages Department P ₹ 3,84,000 o ₹ 96,000 R ₹ 64,000 S ₹ 36,000 Factory overheads of ₹ 4,64,000 are to be apportioned to the departments on direct wages basis. During the month under reference, the company sold all three products after processing them further as under: There is no opening or closing stocks. If these products were sold at the split off stage, that is, without further processing, the selling prices would have been ₹ 20, ₹ 22 and ₹ 10 each per kg respectively for A, B and C. Required: (i) Prepare a statement showing the apportionment of joint costs to joint products. (ii) Present a statement showing product-wise and total profit for the month under reference as per the company’s current processing policy. (iii) What processing decision should have been taken to improve the profitability of the company? (iv) Calculate the product-wise and total profit arising from your recommendation in (iii) above. [CA Inter May 2002, 12 Marks] Answer: (i) Statement showing the apportionment of joint costs to joint products (ii) Statement showing product-wise and total profit for the month under reference (as per the company’s current processing policy) (iii) Processing decision to improve the profitability of the company 44,000 units of product A and 20,000 units of product C should be further processed since the incremental sales revenue generated after further processing is more than the further processing costs incurred. 40,000 units of product B should be sold at the point of-split off since the incremental revenue generated after further processing is less than the further processing costs. (iv) The product wise and total profit arising from the recommendation in (iff) above is as follows: Working Notes: Joint costs and further processing costs (i) Costs incurred in the department P are joint costs of products A, B and C and are equal to ₹ 19,60,000. (ii) Costs incurred in the departments Q, R and S are further processing costs of products A, B and C respectively. Further processing costs of products A, B and C thus are ₹ 1,72,800; ₹ 1,15,200 and ₹ 64,800 respectively. Question 12. Pokemon Chocolates manufactures and distributes chocolate products. It purchases Cocoa beans and processes them into two intermediate products: • Chocolate powder liquor base • Milk-chocolate liquor base These two intermediate products become separately identifiable at a single split off point. Every 500 pounds of cocoa beans yields 20 gallons of chocolate – powder liquor base and 30 gallons of milk-chocolate liquor base. The chocolate powder liquor base is further processed into chocolate powder. Every 20 gallons of chocolate-powder liquor base yields 200 pounds of chocolate powder. The milk- chocolate liquor base is further processed into milk-chocolate. Every 30 gallons of milk- chocolate liquor base yields 340 pounds of milk chocolate. Production and sales data for October, 2021 are: • Cocoa beans processed 7,500 pounds • Costs coprocessing Cocoa beans to split off point ₹ 7,12,500 (including purchase of beans) Pokemon full processes both of its intermediate products into chocolate powder or milk- chocolate. There is an active market for these intermediate products. In October, 2021, Pokemon could have sold the chocolate powder liquor base for ₹ 997.50 a gallon and the milk-chocolate liquor base for ₹ 1,235 a gallon. Required: (i) Calculate how the joint cost of ₹ 7,12,500 wood be allocated between the chocolate powder and milk-chocolate liquor bases under the following methods. (a) Sales value at split off point (b) Physical measure (gallons) (c) Estimated net realisable value, (NRV) and (d) Constant gross-margin percentage NRV (ii) What is the gross-margin percentage of the chocolate powder and milk-chocolate liquor bases under each of the methods in requirements (i) above? (iii) Could Pokemon have increased its operating income by a change in its decision to fully process both of its intermediate products? Show your computations. [CA Inter Nov. 2004, 13 Marks] Answer: (i) Comparison of alternative Joint-Cost Allocation Methods (a) Sales Value at Split-off Point Method (3,000 lbs ÷ 200 lbs) × 20 gallon × ₹ 997.50 = ₹ 2,99,250 (5,100 lbs ÷ 340 lbs) × 30 gallon × ₹ 1,235 = ₹ 5,55,750 (b) Physical Measure Method (3,000 lbs ÷ 200 lbs) × 20 gallon = 300 gallon (5,100 lbs ÷ 340 lbs) × 30 gallon = 450 gallon (c) Net Realisable Value (NRV) Method (d) Constant Gross Margin (%) NRV method (ii) Chocolate powder liquor base Milk chocolate liquor base (iii) Further processing of Chocolate powder liquor base into Chocolate powder  ₹ incremental revenue {₹ 5,70,000 – (₹ 99/ 50 × 300 gal Ion)} 2,70,750.00 Less: Incremental costs 3,02,812.50 Incremental operating income (32,062.50) Further processing of Milk Chocolate liquor base into Milk Chocolate.  ₹ Incremental revenue 6,55,500.00 [₹ 12,11,250 – (₹ 1,235 × 450 gallon)] Less: Incremental costs 6,23,437.50 Incremental operating income 32,062.50 The above computations show that Pokemon Chocolates could increase operating income by ₹ 32,062.50 if chocolate liquor base is sold at split off point and milk chocolate liquor base is processed further. Question 13. Inorganic Chemicals purchases salt and processes it into more refined products such as Caustic Soda, Chlorine and PVC. In the month of July, Inorganic Chemicals purchased Salt for ₹ 40,000. Conversion cost of ₹ 60,000 were incurred upto the split off point, at which time two sealable products were produced. Chlorine can be further processed into PVC. The July production and sales information is as follows: All 800 tons of Chlorine were further processed, at an incremental cost of ₹ 20,000 to yield 500 tons of PVC. There was no beginning or ending inventories of Caustic Soda, Chlorine or PVC in July. There is active market for Chlorine. Inorganic Chemicals could have sold all its July production of Chlorine at ₹ 75 per ton. Required : (1) Show how joint cost of ₹ 1,00,000 would be apportioned between Caustic Soda and Chlorine under each of following methods: (a) sales value at split- off point; (b) physical unit method, and (c) estimated net realisable value. (2) Lifetime Swimming Pool Products offers to purchase 800 tonnes of Chlorine in August at ₹ 75 per tonne. This sale of Chlorine would mean that no PVC would be produced in August. Explain how the acceptance of this offer for the month of August would affect the operating income? [ICAI Module] Answer: 1. (a) Sales value at split-off point method Apportionment of joint cost = $$\frac{\text { Total joint cost }}{\text { Total sale value }}$$ × Sale revenue of each product Joint cost apportioned to Caustic Soda = $$\frac{₹ 1,00,000}{₹ 1,20,000}$$ × ₹ 60,000 Joint cost apportioned to Chlorine = $$\frac{₹ 1,00,000}{₹ 1,20,000}$$ × ₹ 60,000 = ₹ 50,000 (b) Physical measure method  Products Sales (in Ton) Joint Cost Apportioned (₹) Caustic Soda 1,200 60,000 Chlorine 800 40,000 1,00,000 Apportionment of joint cost = $$\frac{\text { Total joint cost }}{\text { Total Physical value }}$$ × Physical units of each product Joint cost apportioned to Caustic Soda = $$\frac{1,00,000}{2,000 \text { tonnes }}$$ × 1,200 tonnes Joint cost apportioned to Chlorine = $$\frac{1,00,000}{2,000 \text { tonnes }}$$ × 800 tonnes = ₹ 40,000 (c) Estimated net realisable value method: 2. Incremental revenue from further processing of Chlorine into PVC (500 tons × ₹ 200 – 800 tons × ₹ 75) × 40,000 Less: Incremental cost of further processing of Chlorine into PVC ₹ 20,000 Incremental operating income from further processing ₹ 20,000 The operating income of Inorganic Chemicals will be reduced by ₹ 20,000 in August if it sells 800 tons of Chlorine to Lifetime Swimming Pool Products, instead of further processing of Chlorine into PVC for sale. ## Budget and Budgetary Control – CA Inter Costing Study Material Budget and Budgetary Control – CA Inter Cost and Management Accounting Study Material is designed strictly as per the latest syllabus and exam pattern. ## Budget and Budgetary Control – CA Inter Costing Study Material 1. Budgetary Control: It is the system of management control and accounting in which all the operations are forecasted and planned in advance to the: extent possible and the actual results compared with the forecasted and planned results. 2. Types of Budget: • Capacity wise – Fixed Budget, Flexible Budget, • Functions wise – Sales Budget, Production Budget, Plant Utilisation Budget, Direct Material Usage Budget, Direct Material Purchase Budget/etc., • Master Budget, • Period wise – Long Term Budgets, Short Term Budgets, Current Budgets. 3. Budget Ratios: It provide information about the performance level, i.e., the extent of deviation of actual performance from budgeted performance: and whether the actual performance is favourable or unfavourable. Ratio is 100% or more – Favourable performance Ratio is less than 100% – Unfavourable performance Theory Questions Question 1. What are the essential characteristics of budget [CA Inter Nov. 2011, 2 Marks] Answer: Essential characteristics of budget: • It is concerned for a definite future period. • It is a detailed plan of all economic activities of a business. • It is a mean to achieve business objectives and it is not an end in itself. • It helps in planning, co-ordination and control. • It acts as a business barometer. • It is usually prepared in the light of past experiences. Question 2. What are the objectives of Budgetary Control System? [ICAI Module] Answer: • Portraying with precision the overall aims of the business and determining targets of performance for each section or department of the business. • Providing a basis for the comparison of actual performance with the predetermined targets and investigation of deviation, if any, of actual performance and expenses from the budgeted figures. • Ensuring optimum use of available resources to maximise profit or production, subject to the limiting factors. • Co-ordinating various activities of the business, and centralising control and yet enabling management to decentralise responsibility and delegate authority in the overall interest of the business. • Providing a basis for revision of current and future policies. • Drawing up long range plans with a fair measure of accuracy. Question 3. Describe the steps involved in establishing good budgeting control system [CA Inter Nov. 2013, 4 Marks] Answer: The following steps are necessary for establishing a good budgetary control system: • Determining the objectives to be achieved, over the budget period, and the policy or policies that might be adopted for the achievement of these objectives. • Determining the activities that should be undertaken for the achievement of objectives. • Drawing up a plan or a scheme of operation in respect of each class of activity, in quantitative as well as monetary terms for the budget period. • Laying out a system of comparison of actual performance by each person, or department with the relevant budget and determination of causes for the variation, if any. • Ensuring that corrective action will be taken where the plan has not been achieved and, if that is not possible, for the revision of the plan. Question 4. What are the advantages of Budgetary Control System? [ICAI Module] Answer:  Points Description 1. Efficiency The use of budgetary control system enables the management to conduct its business activities in an efficient manner. 2. Control on expenditure It is a powerful instrument used by business entity for the control of their expenditure. It provides a yardstick for measuring and evaluating the performance of individuals and their departments. 3. Finding deviations Budget reveals the deviations of the actual from the budgeted figures after making a comparison and communicating the deviation to management. 4. Effective utilisation of resources Effective utilisation of various resources like men, material, machinery and money, is made possible, as the production is planned after taking these into account. 5. Revision of plans Budget helps in the review of current trends and framing of future policies. 6. Cost Consciousness Budgetary control system encourages cost consciousness and maximum utilisation of available resources. Question 5. What is ‘Budgetary Control System’ and discuss the components of the same. [CA Inter Dec. 2021, May 2009, 5 Marks] Answer: It is the system of management control and accounting in which all the operations are forecasted and planned in advance to the extent possible and the actual results compared with the forecasted and planned results. Components of Budgetary Control System: The policy of a business for a defined period is represented by the master budget, the detailed components of which are given, in a number of individual budgets called functional budgets. These functional budgets are broadly grouped under the following heads: 1. Physical budgets: Those budgets which contain information in quantitative terms such as the physical units of sales, production etc. This may include quantity of sales, quantity of production, inventories, and manpower budgets are physical budgets. 2. Cost budgets: Budgets which provides cost information in respect of , manufacturing, administration, selling and distribution, etc. for example, manufacturing costs, selling costs, administration cost, and research and development cost budgets are cost budgets. 3. Profit budgets: A budget which enables the ascertainment of profit. For example, sales budget, profit and loss budget, etc. 4. Financial budgets: A budget which facilitates in ascertaining the financial position of a concern, for example, cash budgets, capital expenditure budget, budgeted balance sheet etc. Question 6. State the limitations of Budgetary Control System. [CA Inter January 2021, 5 Marks] Answer: Limitations of Budgetary Control System  Points Description 1. Based on Estimates Budgets are based on a series of estimates, which are based on the conditions prevalent or expected at the time budget is established. It requires revision in plan if conditions change. 2. Time factor Budgets cannot be executed automatically. Some preliminary steps are required to be accomplished before budgets are implemented. It requires proper attention and time of management. Management must not expect too much during the initial development period. 3. Co-operation Required Staff co-operation is usually not available during the initial budgetary control exercise. In a decentralized organisation, each unit has its own objective and these units enjoy some degree of discretion. In this type of organisation structure, coordination among different units is required. The success of the budgetary control depends upon willing co-operation and teamwork. 4. Expensive The implementation of budget is somewhat expensive. For successful implementation of the budgetary control, proper organisation structure with responsibility is prerequisite. Budgeting process start from the collection of information to for preparing the budget and performance analysis. It consumes valuable resources (in terms of qualified manpower, equipment, etc.) for this purpose; hence, it is an expensive process. 5. Not a substitute for management. Budget is only a managerial tool and must be intelligently applied for management to get benefited. Budgets are not a substitute for good management. 6. Rigid document Budgets are sometime considered as rigid documents. But in reality, an organisation is exposed to various uncertain internal and external factors. Budget should be flexible enough to incorporate ongoing developments in the internal and external factors affecting the very purpose of the budget. Question 7. Describe the salient features of budget manual. [CA Inter RTP May 2021] Answer: Following are the salient features of Budget Manual: • It contains much information which is required for effective budgetary planning. • It is a collection of documents that contains key information for those involved in the planning process. • It includes introductory explanation of the budgetary planning and control process, statement of the budgetary objective and desired results. • It contains a form of organisation chart to show who is responsible for the preparation of each functional budget and the way in which the budgets are interrelated. • In contains a timetable for the preparation of each budget. • Copies of all forms to be completed by those responsible for preparing budgets, with explanations concerning their completion is included in Budget Manual. Question 8. Explain briefly the concept of ‘flexible budget’. [CA inter Nov. 2019, Nov. 2017, Nov. 2008, 2 Marks] Answer: Flexible Budget: A flexible budget is defined as “a budget which, by recognizing the difference between fixed, semi-variable and variable cost is designed to change in relation to the level of activity attained”. A fixed budget, on the other hand is a budget which is designed to remain unchanged irrespective of the level of activity actually attained. In a fixed budgetary control, budgets are prepared for one level of activity whereas in a flexibility budgetary control system, a series of budgets are prepared one for the each of a number of alternative production levels or volumes. Flexible budgets represent the amount of expense that is reasonably necessary to achieve each level of output specified. In other words, the allowances given under flexibility budgetary control system serve as standards of what costs should be at each level of output. Question 9. What are the cases when a flexible budget is found suitable? [CA Inter May 2019, 5 Marks] Answer: Flexible budgeting may be resorted to under following situations: • In the case of new business venture due to its typical nature it may be difficult to forecast the demand of a product accurately. • Where the business is dependent upon the mercy of nature e.g., a per-son dealing in wool trade may have enough market if temperature goes below the freezing point. • In the case of labour-intensive industry where the production of the concern is dependent upon the availability of labour. Suitability for flexible budget: • Seasonal fluctuations in sales and/or production, for example in soft drinks industry. • A company which keeps on introducing new products or makes changes in the design of its products frequently. • Industries engaged in make-to-order business like ship building. • An industry which is influenced by changes in fashion; and • General changes in sales. Question 10. Distinguish between ‘Fixed and flexible budget’. [CA Inter Nov. 2011, May 2016, 4 Marks] Answer: Difference between fixed and flexible budgets  Fixed Budget Flexible Budget 1. It does not change with actual volume of activity achieved. Thus it is rigid. It can be recasted on the basis of activity level to be achieved. Thus it is not rigid. 2. It operates on one level of activity and under one set of conditions. It consists of various budgets for different level of activity. 3. If the budgeted and actual activity levels differ significantly, then cost ascertainment and price fixation do not give a correct picture. It facilitates the cost ascertainment and price fixation at different levels of activity. 4. Comparisons of actual and budgeted targets are meaningless particularly when there is difference between two levels. It provided meaningful basis of comparison of actual and budgeted targets. Question 11. List the eight functional budgets prepared by a business. [CA Inter Nov. 2009, 3 Marks] Answer: The various commonly used Functional budgets are: 1. Sales Budget 2. Production Budget 3. Plant Utilisation Budget 4. Direct Material Usage Budget 5. Direct Material Purchase Budget 6. Direct Labour (Personnel) Budget 7. Factory Overhead Budget 8. Production Cost Budget. Question 12. State the considerations on which capital expenditure budget is prepared. [CA Inter Nov. 2012, 4 Marks] Answer: The preparation of Capital Expenditure Budget is based on the following considerations: 1. Overhead on production facilities of certain departments as indicated by the plant utilisation budget. 2. Future development plans to increase output by expansion of plant facilities. 3. Replacement requests from the concerned departments. 4. Factors like sales potential to absorb the increased output, possibility of price reductions, increased costs of advertising and sales promotion to absorb.increased output, etc. Question 13. Write a short note on ‘Zero Base Budgeting as an approach towards Productive improvement. [CA Inter Nov. 2005, 4 Marks] Answer: Zero Base Budgeting approach plays key role in productivity improvement. It is beneficial in this regard in the following manner: 1. ZBB ensures that the various functions adopted by the organisation are important and critical for the achievement of its objectives and are being performed in the best possible way. 2. ZBB gives an opportunity to the management to allocate resources for different activities only after proper cost benefit analysis. 3. In this approach, ‘chances of arbitrary cuts and enhancement are thus avoided. 4. Department budgets are closely linked with corporate objectives. 5. It provides a systematic approach for the evaluation of different activities and rank them in order of preference for the allocation of scarce resources. 6. Wasteful expenditures can be easily identified and eliminated. Question 14. Why is ‘Zero Base Budgeting’ (ZBB) considered superior to ‘Traditional Budgeting’? Explain. [CA Inter May 2018, 5 Marks] Answer: Zero based budgeting is superior to traditional budgeting: Zero based budgeting is superior to traditional budgeting in the following manner: • It provides a systematic approach for evaluation of different activities. • It ensures that the function undertaken is critical for the achievement of the objectives. • It provides an opportunity for management to allocate resources to various activities after a thorough – cost benefit analysis. • It helps in the identification of wasteful expenditure and then their elimination. It facilitates the close linkage of departmental budgets with corporate objectives. • It helps in the introduction of a system of Management by Objectives. Question 15. What are the advantages and limitations of zero base budgeting? [CA Final Nov. 2004, 4 Marks] Answer: Advantages of ZBB: • It provides a systematic approach for the evaluation of different activities and rank them in order of preference for the allocation of scarce resources. • It ensures that the various functions undertaken by the organization are critical for the achievement of its objectives and are being performed in the best possible way. • It provides an opportunity to the management to allocate resources for various activities only after having a thorough cost-benefit-analysis. The chances of arbitrary cuts and enhancement are thus avoided. • The areas of wasteful expenditure can be easily identified and eliminated. • Departmental budgets are closely linked with corporation objectives. • The technique can also be used for the introduction and implementation of the system of ‘management by objective.’ Thus, it cannot only be used for fulfilment of the objectives of traditional budgeting but it can also be used for a variety of other purposes. Limitations of ZBB: • The work involves in the creation of decision-making and their subsequent ranking has to be made on the basis of new data. This process is very tedious to management. • The activities selected for the purpose of ZBB are on the basis of the traditional functional departments. So the consideration scheme may not be implemented properly. Question 16. Define Zero Base Budgeting and mention its various stages. [CA Inter Nov. 2019, 5 Marks] Answer: Zero-based Budgeting: (ZBB) is an emergent form of budgeting which arises to overcome the limitations of incremental (traditional) budgeting system. Zero- based Budgeting (ZBB) is defined as a method of budgeting which requires each cost element to be specifically justified, although the activities to which the budget relates are being undertaken for the first time, without approval, the budget allowance is zero’. ZBB is an activity based budgeting system where budgets are prepared for each activities rather than functional department. Justification in the form of cost benefits for the activity is required to be given. The activities are then evaluated and prioritized by the management on the basis of factors like synchronisation with organisational objectives, availability of funds, regulatory requirement etc. ZBB is suitable for both corporate and non-corporate entities. In case of non-corporate entities like Government department, local bodies, not for profit organisations, where these entities need to justify the benefits of expenditures on social programmes like mid-day meal, installation of street lights, provision of drinking water etc. ZBB involves the following stages: • Identification and description of Decision packages • Evaluation of Decision packages • Ranking (Prioritisation) of the Decision packages • Allocation of resources Question 17. What are the important points an organization should consider if it wants to adopt Performance Budgeting? [CA Inter Nov. 2020, 5 Marks] Answer: For an enterprise that wants to adopt Performance Budgeting, it is thus imperative that: • The objectives of the enterprise are spelt out in concrete terms. • The objectives are then translated into specific functions, programmes, activities and tasks for different levels of management within the realities of fiscal constraints. • Realistic and acceptable norms, yardsticks or standards and performance indicators should be evolved and expressed in quantifiable physical units. • A style of management based upon decentralised responsibility structure should be adopted, and • An accounting and reporting system should be developed to facilities monitoring, analysis and review of actual performance in relation to budgets. Question 18. Write short note on Budget Ratio. [ICAI Module] Answer: Budget ratios provide information about the performance level, i.e., the extent of deviation of actual performance from the budgeted performance and whether the actual performance is favourable or unfavorable. If the ratio is 100% or more, the performance is considered as favourable and if ratio is less than 100% the performance is considered as unfavourable. The following ratios are usually used by the management to measure development from budget. Practical Questions Flexible Budget Question 1. G Ltd. manufactures a single product for which market demand exists for additional quantity. Present sales of ₹ 6,00,000 utilises only 60% capacity of the plant. The following data are available: (1) Selling price : ₹ 100 per unit (2) Variable cost : ₹ 30 per unit (3) Semi-variable expenses : ₹ 60,000 fixed + ₹ 5 per unit (4) Fixed expenses : ₹ 1,00,000at present level, estimated to increase by 25% at and above 80% capacity. You are required to prepare a flexible budget so as to arrive at the operating profit at 60%, 80% and 100% levels. [ CA Inter Nov. 2020, 5 Marks] Answer: Note: 60% level of activity = 6,000 units (given) 80% level or activity = $$\frac{6,000 \text { units } \times 80 \%}{60 \%}$$ = 8,000 units 100% level of activity = $$\frac{6,000 \text { units } \times 100 \%}{60 \%}$$ = 10,000 units Question 2. The Cost Sheet of a company based on a budgeted volume of Sales of 3,00,000 units per quarter is as under:  ₹ per unit Direct Materials 5.00 Direct Wages 2.00 Factory overheads (50% fixed) 6.00 S/A dm, overheads (1/3 variable) 3.00 Selling price 18.00 When the budget was discussed it was felt that the company would be able to achieve only a volume of 2,50,000 units of production and sales per quarter. The company therefore decided that an aggressive sales promotion campaign should be launched to achieve the following improved operations: Proposal I: • Sell 4,00,000 units per quarter by spending 2,00,000 on special advertising. • The factory fixed costs will increase by 4,00,000 per quarter. Proposal II: • 5,00,000 units per quarter subject to the following conditions. • An overall price reduction of 2 per unit is allowed on all sales. • Variable Selling and Administration Costs will increase by 5%. • Direct Material Costs will be reduced by 1% due to purchase price discounts. • The fixed factory Costs will increase by 2,00,000 more. You are required to prepare a Flexible Budget at 2,50,000, 4,00,000 and 5,00,000 units of output per quarter and calculate the Profit at each of the above levels of output. [CA Final May 2002, 9 Marks] Answer: Statement of flexible budget and profit per quarter at 2,50,000; 4,00,000 and 5,00,000 units of output levels per quarter Under proposal II the factory costs were increased by 2,00,000 more over proposal I. Question 3. The Accountant of KPMR Ltd, has prepared the following budget for the coining year 2022 for its two products ‘AYE’ and ‘ZYF’:  Particulars Product ‘AYE’ Product ‘ZYE’ Production and Sales (in Units) 4,000 3,000 Amount (in ₹) Amount (in ₹) Selling Price per unit 200 180 Direct Material per unit 80 70 Direct Labour per unit 40 35 Variable Overhead per unit 20 25 Fixed Overhead per unit 10 10 After reviewing the above budget, the management has called the marketing team for suggesting some measures for increasing the sales. The marketing team has suggested that by promoting the products on social media, the sales quantity of both the products can be increased by 5%. Also, the selling price per unit will go up by 10%. But this will result in increase in expenditure on variable overhead and fixed overhead by 20% and 5% respectively for both the products. You are required to prepare flexible budget for both the products: (i) Before promotion on social media. (ii) After promotion on social media. [CA Inter Dec. 2021, 5 Mar ks] Answer: (i) Flexible budget (before promotion) (ii) Flexible budget (after promotion) Question 4. Tricon Co. furnishes the following information for the month of September, 2020. During the month 10,000 kg. of materials and 3.100 direct labour hours were utilized. Required: (i) Prepare a flexible budge! for the month. (ii) Deter the material usage variance and the direct labour rate variance for the actual vs the flexible budget. [CA Inter MTP] Answer: (i) Statement Showing “Flexible Budget for 3,200 units Activity Level” (ii) Computation of Variances Material Usage Variance = Standard Cost of Standard Quantity for Actual Production – Standard Cost of Actual Quantity = (SQ – AQ) × SP = [(3,200 units × 3 kg.) – 10,000 kg.] × ₹ 30.00 = ₹ 12,000 (A) Labour Rate Variance = Standard Cost of Actual Time – Actual Cost = (SR – AR) × AH = [₹ 72 – $$\left(\frac{₹ 2,25,000}{3,100}\right)$$] × 3,100 = ₹ 2,400(A) Question 5. You are given the following data of a manufacturing concern:  ₹ Variable Expenses (at 50% capacity): -Materials 48,00,000 -Labour 51,20,000 -Others 7,60,000 Semi variable expenses (at 50% capacity): -Maintenance and Repairs 5,00,000 -Indirect Labour 19,80,000 -Sales-Dept. Salaries 5,80,000 -Sundry Administrative Expenses 5,20,000 Fixed Expenses: -Wages & Salaries 16,80,000 -Rent, Rates and Taxes 11,20,000 -Depreciation 14,00,000 -Sundry Administrative Exp. 17,80,000 The fixed expenses remain constant for ail levels of production. Semi variable expenses remain constant between 45% and 65% of capacity whereas it increases by 10% between 65% and 80% capacity of 20% between 80% and 100% capacity. Sales at various levels are as under:  Capacity Sales (₹) 75% 2,40,00,000 100% 3,20,00,000 Prepare flexible budget at 75% and 100% capacity. [CA Inter May 2017, 8 Marks] Answer: At 75% and 100% capacity level, the semi-variable costs increased by 10% and 20% respectively. Question 6. Maharatna Ltd., a public sector undertaking (PSU), produces product A. The company is in process of preparing its revenue budget for the year 2022. The company has the following information which can be useful in preparing the budget: (i) It has anticipated 12% growth in sales volume from the year 2021 of 4,20,000 tonnes. (ii) The sales price of ₹ 23,000 per tonne will be increased by 10% provided Wholesale Price Index (WPI) increases by 5%. (iii) To produce one tonne of product A, 2.3 tonnes of raw material are required. The raw material cost is ₹ 4,500 per tonne. The price of raw material will also increase by 10% if WPI increase by 5%. (iv) The projected increase in WPI for 2022 is 4%. (v) A total of 6,000 employees works for the company. The company works 26 days in a month. (vi) 85% of employees of the company are permanent and getting salary as per 5- year wage agreement. The earnings per manshift (means an employee cost for a shift of 8 hours) is ₹ 3,000 (excluding terminal benefits). The new wage agreement will be implemented from 1st July 2022 and it is expected that a 15% increase in pay will be given. (vii) The casual employees are getting a daily wage of ₹ 850. The wages in linked to Consumer Price Index (CPI). The present CPI is 165.17 points and it is expected to be 173.59 points in year 2022. (viii)Power cost for the year 2021 is ₹ 42,00,000 for 7,00,000 units (1 unit = 1 Kwh). 60% of power is used for production purpose (directly related to production volume) and remaining are for employee quarters and administrative offices. (ix) During the year 2021, the company has paid ₹ 60,00,000 for safety and maintenance works. The amount will increase in proportion to the volume of production. (x) During the year 2021, the company has paid ₹ 1,20,000 for the purchase of diesel to be used in car hired for administrative purposes. The cost of diesel will increase by 15% in year 2022. (xi) During the year 2021, the company has paid ₹ 6,00,000 for car hire charges (excluding fuel cost). In year 2022, the company has decided to reimburse the diesel cost to the car rental company. Doing this will attract 5% GST on Reverse Charge Mechanism (RCM) basis on which the company will not get GST input credit. (xii) Depreciation on fixed assets for the year 2021 is ₹ 80,40,00,000 and it will be 15% lower in 2022. Required: From the above information prepare Revenue (Flexible) budget for the year 2022 and also show the budgeted profit/loss for the year. [CA Inter RTP May 2022] Answer: Revenue Budget (Flexible Budget) of Maharatna Ltd. for the Year 2022 Working Notes: 1. Calculation of Raw Material Cost: 2. Calculation of Wages and Salary Cost: 3. Calculation of Power Cost: 4. Calculation of Car Hire Charges: Expense Budget Question 7. KLM Limited has prepared its expense budget for 50,000 unIts in its factory for the year 2020-2 1 as detailed below:  ₹ per unit Direct Materials 125 Direct Labour 50 Variable Overhead 40 Direct Expenses 15 Selling Expenses (20% fixed) 25 Factory Expenses (100% fixed) 15 Administration expenses (100% fixed) 8 Distribution expenses (85% variable) 20 Total 298 Prepare an expense budget for the production of 35,000 units and 70,000 units. [CA Inter May 2013, Nov 2019, RTP] Answer: Expense Budget of KLM Ltd.  Selling Expenses: Fixed cost per unit = ₹ 25 × 20% = ₹ 5 Fixed Cost = ₹ 5 × 50,000 units = ₹ 2,50,000 Variable Cost Per unit = ₹ 25 – ₹ 5 = ₹ 20 Distribution Expenses: Fixed cost per unit = ₹ 20 × 15% = ₹ 3 Fixed Cost = ₹ 3 × 50,000 units = ₹ 1,50,000 Variable cost per unit = ₹ 20 – ₹ 3 = ₹ 17 Question 8. RST Limited is presently operating at 50% capacity and producing 30,000 units. The entire output is sold at a price of ₹ 200 per unit. The cost structure at the 50% level of activity is as under:  ₹ Direct Material 75 per unit Direct Wages 25 per unit Variable Overheads 25 per unit Direct Expenses 15 per unit Factory Expenses (25% fixed) 20 per unit Selling and Distribution Exp. (80% variable) 10 per unit Office and Administrative Exp. (100% fixed) 5 per unit The company anticipates that the variable costs will go up by 10% and fixed costs will go up by 15%. You are required to prepare an Expense budget, on the basis of marginal cost for the company at 50% and 60% level of activity and find out the profits at respective levels. [CA Inter Nov. 2014, 8 Marks] Answer: Note: 50% level of activity = 30,000 units (given) 60% level of activity = $$\frac{30,000 \text { units } \times 60 \%}{50 \%}$$ = 36,000 units Functional Budget Question 9. A Vehicle manufacturer has prepared sales budget for the next few months, and the following draft figures are available:  Month No. of vehicles October 40,000 November 35,000 December 45,000 January 60,000 February 65,000 To manufacture a vehicle a standard cost of ₹ 11,42,800 is incurred and sold through dealers at a uniform selling price of ₹ 17,14,200 to customers. Dealers are paid 15% commission on selling price on sale of a vehicle. Apart from other materials, four units of Part-X are required to manufacture a vehicle. It is a policy of the company to hold stocks of Part-X at the end of each month to cover 40% of next month’s production. 48,000 units of Part-X are in stock as on 1st October. There are 9,500 Nos. of completed vehicles in stock as on 1st October and it is policy to have stocks at the end of each month to cover 20% of the next month’s sales. You are required to (i) Prepare Production budget (in Nos.) for the month of October, November, December and January. (ii) Prepare a Purchase budget for Part-X (in units) for the months of October, November and December. (iii) Calculate the budgeted gross profit for the quartet October to December. [CA Inter May 2020 RTP] Answer: (i) Preparation of Production Budget (in units) (ii) Preparation of Purchase budget for Part-X (iii) Budgeted Gross Profit for the Quarter October to December Net Selling Price per unit = ₹ 17,14,200 – (15% commission on ₹ 17,14,200) = ₹ 14,57,070 Question 10. RS Ltd. manufactures and sells a single product and has estimated sale;; revenue of ₹ 302.4 lakh during the year based on 20% profit on selling price. Each unit of product requires 6 kg of material A and 3 kg of material B and processing time of 4 hours in machine shop and 2 hours in assembly shop Factory overheads are absorbed at a blanket rate of 20% of direct labour. Variable selling & distribution overheads are ₹ 60 per unit sold and fixed selling & distribution overheads are estimated to be ₹ 69,12,000. The other relevant details are as under: Purchase Price: Material A ₹ 160 per kg Material B ₹ 100 per kg Labour Rate: Machine Shop ₹ 140 per hour Assembly Shop ₹ 70 per hour  Finished Stock Material A Material B Opening Stock 2,500 units 7,500 kg 4000 kg Closing Stock 3,000 units 8,000 kg 5,500kg Required: (i) Calculate number of units of product proposed to be sold and selling price per unit, (ii) Prepare Production Budget in units, and (iii) Prepare Material Purchase Budget in units. [CA Inter May 2021 RTP] Answer: Statement Showing ‘Total Variable Cost for the year’  Estimated Sales Revenue 3,02,40,000 Less: Desired Profit Margin on Sale @ 20% 60,48,000 Estimated Total Cost 2,41,92,000 Less: Fixed Selling and Distribution Overheads 69,12,000 Total Variable Cost 1,72,80,000 Statement Showing ‘Variable Cost per unit’. (i) Calculation of number of units of product proposed to be sold and selling price per unit ? Number of Units Sold = Total Variable Cost/Variable Cost per unit = ₹ 1,72,80,000/₹ 2,160 = 8,000 units Selling Price per unit = Total Sales Value/Number of Units Sold = ₹ 3,02,40,000/8,000 units = ₹ 3,780 (ii) Production Budget (units)  Units Budgeted Sales 8,000 Add: Closing Stock. 3,000 Total Requirements 11,000 Less: Opening Stock (2,500) Required Production 8,500 (iii) Materials Purchase Budget (kg.) Question 11. AK Limited produces and sells a single product. Sales budget for calendar year 2021 by a quarters is as under: The year is expected to open with an inventory of 6,000 units of finished products and close with inventory of 8,000 units. Production is customarily scheduled to provide for 70% of the current quarter’s sales demand plus 30% of the following quarter demand. The budgeted selling price per unit is ₹ 40. The standard cost details for one unit of the product are as follows: Variable Cost ₹ 34.50 per unit. Fixed Overheads ₹ 2 hours 30 minutes @ ₹ 2 per hour based on a budgeted production volume of 1,10,000 direct labour hours for the year. Fixed overheads are evenly distributed throughout the year. You are required to: (i) Prepare Quarterly Production Budget for the year. (ii) In which quarter of the year, company expected to achieve bread-even point. [CA Inter May 2012, 5 Marks] Answer: (i) Production Budget for the year 2021 by Quarters (ii) Break Even Point = Fixed Cost/ Contribution per unit = 2,20,000/₹ 5.50 = 40,000 units Contribution per unit = ₹ 40 – ₹ 34.50 = ₹ 5.50 Total sales in the quarter II is 40000 equal to BEP means BEP achieved in II quarter. Question 12. X Y Z Limited is drawing a production plan for its two products – Product ‘xml’ and ‘Product ‘yml’ for the year 2020-21. The company’s policy is to maintain closing stock of finished goods at 25% of the anticipated volume of sales of the succeeding month. The following are the estimated data for the two products:  xml yml Budgeted Production (in units) 2,00,000 1,50,000 Direct Material (per unit) ₹ 220 ₹ 280 Direct Labour (per unit) ₹ 130 ₹ 120 Direct Manufacturing Expenses ₹ 4,00,000 ₹ 5,00,000 The estimated units to he sold in the first four months of the year 2020-21 are as under: Prepare: (i) Production Budget (Month wise) (ii) Production cost Budget (for first quarter of the year) [CA Inter May 2015, 5 Marks] Answer: (i) Production Budget of Product ‘xml’ and ‘yml’ (month wise in units) Opening stock of April is the closing stock of March, which is as per company’s policy 25% of next months sale. (ii) Production Cost Budget (for first quarter of the year) Question 13. An electronic gadget manufacturer has prepared sales budget for the next few months. In this respect, following figures are available:  Months Electronic gadgets’ sales January 5000 units February 6000 units March 7000 units April 7500 units May 8000 units To manufacture an electronic gadget, a standard cost of ₹ 1,500 is incurred l and it is sold through dealers at an uniform price of ₹ 2,000 per gadget to customers. Dealers are given a discount of 15% on selling price. Apart from other materials, two units of batteries are required to manufacture a gadget. The company wants to hold stock of batteries at the end of each month to cover 30% of next month’s production and to hold slock of manufactured gadgets to cover 25% of the next month’s sale. 3,250 units of batteries and 1,200 units of manufactured gadgets were in stock on 1st January. Required: (i) Prepare production budget (in units) for the month of January, February, March and April. (ii) Prepare purchase budget for batteries (in units) for the month of January, February and March and calculate profit for the quarter ending on March. [CA Inter Nov. 2018, 10 Marks] Answer: (i) Preparation of Production Budget (in Units) (ii) Preparation of Purchase budget Question 14. A Company manufactures two Products A and B by making use of two types of materials, viz., X and Y. Product A requires 10 units of X and 3 units of Y. Product B requires 5 units of X and 2 units of Y. The price of X is 2 per unit and that of Y is 3 per unit. Standard hours allowed per product are 4 and 3, respectively. Budgeted wages rate is 8 per hour. Overtime premium is 50% and is payable, if a worker works for more than 40 hours a week. There are 150 workers. The Sales Manager has estimated the sales of Product A to be 5,000 units and Product B 10,000 units. The target productivity ratio (or efficiency ratio) for the productive hours worked by the direct worker in actually manufacturing the product is 80%, in addition, the non-productive downtime is budgeted at 20% of the productive hours worked. There are twelve 5-day weeks in the budget period and it is anticipated that sales and production will occur evenly throughout the whole period. It is anticipated that stock at the beginning of the period will be: Product A 800 units; Product B 1,680 units. The targeted closing stock ex-pressed in terms of anticipated activity during the budget period are Product A 12 days sales; Product B 18 days sales. The opening and closing stock of raw material of X and Y will be maintained according to requirement of stock position for Products A and B. You are required to prepare the following for the next period: (i) Material usage and Material purchase budget in terms of quantities and values. (ii) Production budget. (iii) Wages budget for the direct workers. [CA Final Nov. 2004, 8 Marks] Answer: (i) Material Usage (ii) Production Budget Note: Computation of closing stock Budgeted period (12 weeks × 5) = 60 days Budgeted closing stock: Product A = 12 days sales = $$\frac{5,000 \times 12}{60}$$ = 1,000 units Product B = 18 days sales = $$\frac{10,000 \times 18}{60}$$ = 3,000 units (iii) Wages Budget Question 15. Company is engaged in manufacturing two products ‘X’ and ‘ Y’ Product X uses one unit of component *P’ and two units of component ‘Q\ Product ‘Y’ uses two units of component ‘P’, one unit of component ‘Q’ and two units of component ‘R’. Component ‘R’ which is assembled in the factory uses one unit of component ‘O’. Components ‘P’ and ‘Q’ are purchased from the market. The company has prepared the following forecast of sales and inventory for the next year:  Product ‘X’ Product ‘Y’ Sales (in units) 80,000 1,50,000 At the end of the years 10,000 20,000 At the beginning of the year 30,000 50,000 The production of both the products and the assembling of the component R’ will be spread out uniformly throughout the year. The company at present orders its inventory of ‘P’ and ‘Q’ in quantities equivalent to 3 months production. The company has compiled the following data related to two components:  P Q Price per unit (₹) 20 8 Order placing cost per order (₹) 1,500 1,500 Carrying cost per annum 20% 20% Required: (a) Prepare a Budget of production and requirements of components during next year. (b) Suggest the optimal order quantity of components ‘P’ and ‘Q’. [CA Final May 2006, 11 Marks] Answer: (a) Production Budget for products X and Y  X units Y units Inventory at the end of the year Sales forecast Total requirements Less: Beginning inventory Production 10,000 80,000 20,000 1,50,000 90,000 30,000 1,70,000 50,000 60,000 1,20,000 Budgeted requirements of components P, Q and R (b) Optimal order quantity: P = $$\sqrt{\frac{2 \times 3,00,000 \times 1,500}{20 \times 20 \%}}$$ = 15,000 components Q = $$\sqrt{\frac{2 \times 4,80,000 \times 1,500}{8 \times 20 \%}}$$ = 30,000 components Question 16. PVS Ltd. manufactures and sells a single product and estimated the following related information for the period November, 2020 to March, 2021. Additional information: • Closing stock of finished goods at the end of March, 2021 is 10,000 units. • Each unit of finished output requires 2 kg. of Raw Material ‘A’ and 3kg of Raw Material ‘B’. You are required to prepare the following budgets for the period November, 2020 to March, 2021 on monthly basis: (i) Sales Budget (in ₹) (ii) Production budget (in units) (iii) Raw materials ‘A’ and ‘B’ separately (in units) [CA Inter July 2021, 5 Marks] Answer: Question 17. XY Co. Ltd. manufactures two products viz., X and Y and sells them through two divisions, East and West. For the purpose of Sales Budget to the Budget Committee, following information has been made available for the year 2019-20: Adequate market studies reveal that product X is popular but under priced. It is expected that if the price of X is increased by ₹ 1, it will, find a ready market. On the other hand, Y is overpriced and if the price of Y is reduced by x 1 it will have more demand in the market. The company management has agreed for the aforesaid price changes. On the basis of these price changes and the reports of salesmen, following estimates have been prepared by the Divisional Managers: Percentage increase in sales over budgeted sales  Product East Division West Division X + 10% + 5% Y + 20% + 10% With the help of intensive advertisement campaign, following additional sales (over and above the abovementioned estimated sales by Divisional Managers) are possible:  Product East Division West Division X 60 units 70 units Y 40 units 50 units You are required to prepare Sales Budget for 2020-21 after incorporating above estimates and also show the Budgeted Sales and Actual Sales of 201920. [CA Inter Nov. 2015, 8 Marks] Answer: Statement Showing Sales Budget for 2020-21 Working Notes: 1. 400 × 11096 + 60 = 500 units 2. 600 × 10596 + 70 = 700 units 3. 300 × 12096 + 40 = 400 units 4. 500 × 11096 + 50 = 600 units Statement Showing Sales Budget for 2019-20 Question 18. Following is the sales budget for the first six months of the year 2021 in respect of FOR Ltd. : Finished goods inventory at the end of each month is expected to be 20H» of budgeted sales quantity for the following month. Finished goods inventory was 2,700 units on January 1, 2021. There would be no work-in-progress at the end of any month. Each unit of finished product requires two types of materials as detailed below: Material X : 4 kgs @ ₹ 10/kg Material Y : 6 kgs @ ₹ 15/kg Material on hand on January 1,2021 was 19,000 kgs of material X and 29,000 kgs of material Y. Monthly closing stock of material is budgeted to be equal to half of the requirements of next month’s production. Budgeted direct labour hour per unit of finished product is 3/4 hour. Budgeted direct labour cost for the first quarter of the year 2021 is ₹ 10,89,000. Actual data for the quarter one, ended on March 31, 2021 is as under: Actual production quantity: 40,000 units Direct material cost (Purchase cost based on materials actually issued to production) Material X : 1,65,000 kgs @ ₹ 10.20/kg Material Y : 2,38,000 kgs @ ₹ 15.10/kg Actual direct labour hours worked: 32,000 hours Actual direct labour cost: ₹ 13,12,000 Required: (a) Prepare the following budgets: (i) Monthly production quantity for the quarter one. (ii) Monthly raw material consumption quantity budget from January, 2021 to April, 2021. (iii) Materials purchase quantity budget for the quarter one. (b) Compute the follow ing variances : (i) Material cost variance (ii) Material price variance (iii) Material usage variance (iv) Direct labour cost variance (v) Direct labour rate variance (vi) Direct labour efficiency variance [ICAI Module] Answer: (a) (i) Total Budgeted Output for the Quarter ended March 31, 2009 = (9,700 + 12,400 + 14,200) = 36,300 units. (ii) Raw Material Consumption Budget (in quantity) (iii) Raw Materials Purchase Budget (in quantity) (b) Computation of variances Material variances Calculation of Standard Quantity (SQ): Material X = 40,000 × 4 = 1,60,000 kgs. Material Y = 40,000 × 6 = 2,40,000 kgs. Basic calculation Calculation of Material Variances: (a) Material Cost Variance = (SQ × SP) – (AQ × AP) Material X = 16,00,000 – 16,83,000 = 83,000 (A) Material Y = 36,00,000 – 35,93,800 = 6.200 (F) (b) Material Price Variance = AQ (SP – AP) Material X = 1,65,000 (10 – 10.20) = 33,000 (A) Material Y = 2,38,000 (15 – 15.10) = 23.800 (A) (c) Material Usage Variance = SP (SQ – AQ) Material X = 10 (1,60,000 – 1,65,000) = 50,000 (A) Material Y = 15 (2,40,000 – 2,38,000) = 30,000 (F) Labour Variances: Budgeted output for the quarter = 36,300 units Budgeted hours = 36,300 units × 3/4 = 27,225 hours Calculation of Labour Cost Variances: (a) Direct Labour Cost Variance = (SH × SR) – (AH × AR) = (30,000 × 40) – (32,000 × 41) = 1,12,000 (A) (b) Direct Labour Rate Variance = AH (SR – AR) = 32,000 (40 – 41) = 32,000 (A) (c) Direct Labour Efficiency Variance = SR (SH – AH) Material X = 40 (30,000 – 32,000) Material Y = 80,000 (A) Budget Ratios Question 19. Calculate Efficiency and Capacity ratio from the following figures:  Budgeted production 80 units Actual production 60 units Standard lime per unit 8 hours Actual hours worked 500 [CA Inter Nov. 2007, 2 Marks] Answer: Standard hour for actual production = 60 units × 8 hours = 480 hours Actual hours worked = 500 hours Budgeted hours = 80 units × 8 hours = 640 hours Efficiency Ratio = $$\frac{\text { Standard hours for actual production }}{\text { Actual hours worked }}$$ × 100 = $$\frac{480}{500}$$ × 100 = 96% Capacity Ratio = $$\frac{\text { Actual hours worked }}{\text { Budgeted hours }}$$ × 100 = $$\frac{500}{640}$$ × 100 = 78.125% Question 20. Calculate efficiency and activity ratio from the following data: Capacity ratio = 75% Budgeted output = 6,000 units Actual output = 5,000 units Standard Time per unit = 4 hours [CA Inter Nov. 2009, 2 Marks] Answer: Question 21. Following data is available for ABC Ltd:  Standard working hours 8 hours per day of 5 days per week Maximum Capacity 60 employees Actual working 50 employees Actual hours expected to be worked per four week 8,000 hours Standard hours expected to be earned per hour week 9,600 hours Actual hours worked in the four week period 7,500 hours Standard hours earned in the four week period 8,800 hours The related period is of four weeks. Calculate the following Ratios: (i) Efficiency Ratio (ii) Activity Ratio (iii) Standard Capacity Usage Ratio (iv) Actual Capacity Usage Ratio (v) Actual Usage of Budgeted Capacity Ratio [CA Inter May 2019, 5 Marks] Answer: Miscellaneous Question 22. Company prepared the following budget for a year: After evaluating the half-yearly performance, it was observed that the Company would be able to achieve only 80% of the original budgeted sales. The revised budgeted sale as envisaged above was estimated at 1,080 lakhs after taking into account a reduction in the selling price by 10%. You are required to prepare a statement showing the break up of the original and revised budget for the year. [CA Final May 2000, 6 Marks] Answer: Statement showing the break-up of the original and revised for a year: (₹ in lakhs) Working notes: 1. Revised budgeted sales (after taking into account 10% reduction in selling price) If revised budgeted S.P, is ₹ 90, the original budgeted S.P. is 100 If revised budgeted S.P. is ₹ 1, the original budgeted S.P. is $$\frac{100}{90}$$ If revised budgeted sales at revised S.P. is ₹ 1080 lakhs then the revised budgeted sales at original S.P. will be $$\frac{100}{90}$$ × 1080 lakhs = ₹ 1,200 lakhs 2. Original budgeted sales If revised budgeted sales at original S.P. is ₹ 80 then the original budgeted sales at original selling price is ₹ 100. If revised budgeted sales at original S.P. is ₹ 1 then the original sales at original selling price is $$\frac{₹ 100}{₹ 80}$$. If revised budgeted sales at original S.P. is ₹ 1,200 lakhs then the original budgeted sales at Original selling price is $$\frac{₹ 100}{₹ 80}$$ × 1,200 lakhs = ₹ 1,500 Lakhs. Question 23. The information of Z Ltd. for the year ended 31st March, 2020 is as below:  ₹ Direct materials 17,50,000 Direct wages 12,50,000 Variable factory overhead 9,50,000 Fixed factory overhead 12,00,000 Other variable costs 6,00,000 Other fixed costs 4,00,000 Profit 8,50,000 Sales 70,00,000 During the year, the company manufactured two products X and Y, and the output and cost were:  X Y Output (units) 8,000 4,000 Selling price per unit (₹) 600 550 Direct material per unit (₹) 140 157.50 Direct wages per unit (₹) 90 132.50 Variable factory overheads are absorbed as a percentage of direct wages and other variable costs are computed as: Product X – ₹ 40 per unit and Product Y- ₹ 70 per unit For the F,Y. 2020-21, it is expected that demand for products X and Y will fall by 20% & 10% respectively. It is also expected that direct wages cost will raise by 20% and other fixed costs by 10%. Products will be required to be sold at a discount of 20%. You are required to: (i) Prepare product-wise profitability statement on marginal costing method for the F.Y. 2019-20 and (ii) Prepare a budget for the FY 2020-21. [CA Inter Nov. 2020 RTP] Answer: (i) Product-wise Profitability Statement for the FY 2019-20 Variable factory overhead rate = $$\frac{\text { Variable factory overhead }}{\text { Direct wages }}$$ × 100 = $$\frac{9,50,000}{12,50,000}$$ × 100 = 76% (ii) Preparation of Budget for the FY 2020-21: Question 24. The accountant of manufacturing company provides you the following details for year 2019-20:  ₹ Direct materials 28,00,000 Direct Wages 16,00,000 Fixed factory overheads 16,00,000 Variable factory overheads 16,00,000 Other variable costs 12,80,000 Other fixed costs 12,80,000 Profit 18,40,000 Sales 1,20,00,000 During the year, the company manufactured two products A and B and the output and costs were:  A B Output (units) 2,00,000 1,00,000 Selling price per unit ₹ 32.00 ₹ 56.00 Direct materials per unit ₹ 8.00 ₹ 12.00 Direct wages per unit ₹ 4.00 ₹ 8.00 Variable factory overhead is absorbed as a percentage of direct wages. Other variable costs have been computed as: Product A ₹ 4.00 per unit Product B ₹ 4.80 per unit. During 2020-21, it is expected that the demand for product A will fail by 25% and for B by 50%. It is decided to manufacture a new product C, the cost for which is estimated as follows:  Product C Output (units) 2,00,000 Selling price per unit ₹ 28.00 Direct materials per unit ₹ 6.40 Direct wages per unit ₹ 4.00 It is anticipated that the other variable costs per unit of Product C will be same as for product A. Prepare a budget to present to the management, showing the current position and the position for 2020-21. Comment on the comparative results. [CA In ter RTP Nov 2021] Answer: Introduction of Product C is likely to increase profit by ₹ 1,60,000 (₹ 20,00,000 – ₹ 18,40,000) in 2020-21 as compared to 2019-20 even if the demand for Products A & B falls, Therefore, introduction of product C is recommended. ## Marginal Costing – CA Inter Costing Study Material Marginal Costing – CA Inter Cost and Management Accounting Study Material is designed strictly as per the latest syllabus and exam pattern. ## Marginal Costing – CA Inter Costing Study Material Marginal Costing: It is a costing system where products or services and inventories are valued at variable costs only. It does not consider fixed costs. • Total Contribution (C) = Sales Revenue (S) – Total Variable Cost (V) Contribution per unit = Sales price per unit – Variable cost per unit • Profit = Contribution – Fixed Cost • Marginal Cost Equation = S – V = C = F ± P S = Selling price per unit, V = Variable cost per unit, C = Contribution, F = Fixed Cost Profit Volume (P/V) Ratio: It shows the proportion of sales available to cover fixed costs and profit. P/V Ratio = $$\frac{\text { Contribution }}{\text { Sales }}$$ × 100 OR $$\frac{\text { Change in Contribution or profit }}{\text { Change in Sales }}$$ × 100 OR $$\frac{\text { Fixed Cost }}{\text { Breakeven Sales }}$$ × 100 Sales = $$\frac{\text { Contribution }}{\text { PV Ratio }}$$ Fixed cost = Break-even sales × P/V Ratio Break-even point: It is the point where neither profits nor losses have been made. BEP (in units) = $$\frac{\text { Fixed Cost }}{\text { Contribution per unit }}$$ BEP (in ₹) = $$\frac{\text { Fixed Cost }}{\text { PV Ratio }}$$ OR Total Sales – Margin of Safety Sales Cash Break-even point: When break-even point is calculated only with those fixed costs which arc payable in cash. Depreciation and other- non-cash fixed costs are excluded from fixed costs. = $$\frac{\text { Cash Fixed Costs }}{\text { Contribution per unit }}$$ Multi-product break even analysis; Break-even point needs adjustm ents when more than one product is manufactured by using a common fixed costs. Composite Contribution is calculated by taking weights for the products. VVdghty = sales:mix quantity or sales mix values, BEP = $$\frac{\text { Common Fixed Cost }}{\text { Composite Contribution per unit }}$$ Margin of Safety = $$\frac{\text { Profit }}{\text { PV Ratio }}$$ or Total sales – Break-even sales Margin of Safety ratio =  x 100 2. Absorption Costing: A method of costing in which all costs, both variable | and fixed are charged to operations, process or product. Theory Questions Question 1. What are the characteristics of marginal costing? [ICAI Module] Answer: • All elements of cost are classified into fixed and variable components. Semi-variable costs are also analyzed into fixed and variable elements. • The marginal or variable costs are treated as the cost of product. • The value of finished goods and work-in-progress is also comprised only of marginal costs. Variable selling and distribution are excluded for valuing these inventories. Fixed costs are not considered for valuation of closing stock of finished goods and closing WIP. • Fixed costs are treated as period costs and are charged to profit and loss account for the period for which they are incurred. • Prices are determined with reference to marginal costs and contribution margin. • Profitability of departments and products is determined with reference to their contribution margin. Question 2. State the advantages of marginal costing. [CA Inter May 2001, 6 Marks] Answer: 1. Simplified Pricing Policy: The marginal cost remains constant per unit of output whereas the fixed cost remains constant in total. This help in making firm decisions on pricing policy. 2. Proper recovery of Overheads: Overheads are recovered in costing on the basis of pre-determined rates. If fixed overheads are included on the basis of pre-determined rates, there will be under-recovery or over-recovery of. This creates the problem of treatment of such under or over-recovery of overheads. Marginal costing avoids such under or over-recovery of overheads. 3. Shows Realistic Profit: Under the marginal costing, the stock of finished goods and WIP are carried on marginal cost basis and the fixed expenses are written off to profit and loss account as period cost. This shows the true profit of the period. 4. How much to produce: Marginal costing helps in the preparation of break-even analysis which shows the effect of increasing or decreasing production activity on the profitability of the company. 5. More control over expenditure: Segregation of expenses as fixed and variable helps the management to exercise control over expenditure. The management can compare the actual variable expenses with the budgeted variable expenses and take corrective action through analysis of variances. 6. Helps in Decision Making: Marginal costing helps the management in taking a number of business decisions like make or buy, discontinuance of particular product, replacement of machines, etc. Question 3. What are the limitations of marginal costing? [CA Inter May 2019, May 2001, 5 Marks] Answer: (i) Difficulty in classifying fixed and variable elements: It is difficult to classify exactly the expenses into fixed and variable category. Most of the expenses are neither totally variable nor wholly fixed. For example, various amenities provided to workers may have no relation either to volume of production or time factor. (ii) Dependence on key factors: Contribution of a product itself is not a guide for optimum profitability unless it is linked with the key factor. (iii) Scope for Low Profitability: Sales staff may mistake marginal cost for total cost and sell at a price; which will result in loss or low profits. Hence, sales staff should be cautioned while giving marginal cost. (iv) Faulty valuation: Overheads of fixed nature cannot altogether be excluded particularly in large contracts, while valuing the work-in-progress. In order to show the correct position fixed overheads have to be included in work-in-progress. (v) Unpredictable nature of Cost: Some of the assumptions regarding the behaviour of various costs are not necessarily true in a realistic situation. For example, the assumption that fixed cost will remain static throughout is not correct. Fixed cost may change from one period to another. Also, the variable costs do not remain constant per unit of output. There may be changes in the prices of raw materials, wage rates etc. after a certain level of output has been reached. (vi) Marginal costing ignores time factor and investment: The marginal cost of two jobs may be the same but the time taken for their completion and the cost of machines used may differ. The true cost of a job which takes longer time and uses costlier machine would be higher. This fact is not disclosed by marginal costing. (vii) Understating of W-I-P: Under marginal costing stocks and work-in-progress are understated. Question 4. Discuss basic assumptions of Cost Volume Profit analysis. [CA Inter May 2012, May 2003, 4 Marks] Answer: Assumptions of CVP Analysis: • Changes in the levels of revenues and costs arise only because of changes in the number of products (or service) units produced and sold. • Total cost can be separated into two components: Fixed and variable • Graphically, the behaviour of total revenues and total cost are linear in relation to output level within a relevant range. • Selling price, variable cost per unit and total fixed costs are known and constant. • The proportion of different products when multiple products are sold will remain constant as the level of total units sold changes. • All revenues and costs can be added, sub-traded and compared without taking into account the time value of money. Question 5. Explain and illustrate cash break-even chart. [CA Inter May 2008, May 2001, 3 Marks] Answer: When break-even point is calculated only with those fixed costs which are payable in cash, such a break-even point is known as cash break-even point. This means that depreciation and other non-cash fixed costs are excluded from the fixed costs in computing cash break-even point. It is computed as under: Cash BEP (Units) = $$\frac{\text { Cash Fixed Costs }}{\text { Contribution per unit }}$$ Hence for example suppose insurance has been paid on 1st January, 2016 till 31st December, 2020 then this fixed cost will not be considered as a cash fixed cost for the period 1st January, 2018 to 31st December, 2020. Question 6. What is Margin of Safety? What does a large Margin of Safety indicates? How can you calculate Margin of Safety? [CA Inter July2021,5Marks] Answer: The margin of safety can be defined as the difference between the expected level of sale and the break-even sales. Large margin of safety indicates the high chances of making profits. The Margin of Safety can also be calculated by identifying the difference between the projected sales and break-even sales in units multiplied by sale price per unit. Margin of Safety (in units) = $$\frac{\text { Profit }}{\text { Contribution per unit }}$$ Margin of Safety (in ₹) = $$\frac{\text { Profit }}{\text { Profit Volume Ratio }}$$ Question 7. Write short note on Angle of Incidence. [CA Inter May 2012, 2 Marks] Answer: Angle of Incidence is formed by the intersection of sales line and total cost line at the break-even point. This angle shows the rate at which profits are being earned once the break-even point has been reached. The wider the angle the greater is the rate of earning profits. A large angle of incidence with a high margin of safety indicates extremely favourable position. Question 8. Differentiate between “Marginal and Absorption Costing”. [CA Inter Nov. 2001, Nov. 2020, 5 Marks] Answer: Difference between Marginal costing and Absorption costing  Marginal costing Absorption costing (i) Only variable costs are considered for product costing and inventory valuation. Both fixed and variable costs are consid­ered for product costing and inventory valuation. (ii) Fixed costs are regarded as period costs. The Profitability of different products is judged by their P/V ratio. Fixed costs are charged to the cost of production. Each product bears a rea­sonable share of fixed cost and thus the profitability of a product is influenced by the apportionment of fixed costs. (iii) Cost data presented highlight the total contribution of each product. Cost data are presented in conventional pattern. Net profit of each product is de­termined after subtracting fixed cost along with their variable costs. (iv) The difference in the magnitude of opening stock and closing stock does not affect the unit cost of production. The difference in the magnitude of opening stock and closing stock affects the unit cost of production due to the impact of related fixed cost. (v) In case of marginal costing the cost per unit remains the same, irrespective of the production as it is valued at variable cost. In case of absorption costing the cost per unit reduces, as the production increases as it is fixed cost which reduces, whereas, the variable cost remains the same per unit. Practical Questions Question 1. Product Z has a profit-volume ratio of 28%. Fixed operating costs directly attributable to product Z during the quarter will be ₹ 2,80,000. Calculate the sales revenue required to achieve a quarterly profit of ₹ 70,000. [CA Inter May 2009, 3 Marks] Answer: Computation of sales revenue: P/V ratio = 28% Quarterly fixed Cost = ₹ 2,80,000 Desired Profit = ₹ 70,000 Sales revenue required to achieve desired profit Total contribution = Fixed Cost + Desired Profit = ₹ 2,80,000 + ₹ 70,000 = ₹ 3,50,000 28% = ₹ 12,50,000 Total sales revenue = $$\frac{\text { Total contribution }}{\mathrm{P} / \mathrm{V} \text { ratio }}$$ = $$\frac{₹ 3,50,000}{28 \%}$$ = ₹ 12,50,000 Question 2. Following information are available for the years 2020 and 2021 of PIX Limited:  Years 2020 2021 Sales ₹ 32,00,000 ₹ 57,00,000 Profit/ (Loss) (₹ 3,00,000) ₹ 7, 00,000 Calculate: (i) P/V ratio (ii) Total fixed cost (iii) Sales required to earn a Profit of ₹ 12,00,000 [CA Inter Nov. 2016, May 2010, 5 Marks] Answer: (i) P/V Ratio (ii) Total fixed cost = Total contribution – Profit = (Sales × P/V ratio) – Profit = (₹ 57,00,000 × 40%) – ₹ 7,00,000 = ₹ 22,80,000 – ₹ 7,00,000 = ₹ 15,80,000 (iii) Total contribution = $$=\frac{\text { Total contribution }}{\mathrm{P} / \mathrm{V} \text { ratio }}$$ =  = ₹ 69,50,000 Question 3. PQR Ltd. has furnished the following data for the two years:  2019-20 2020-21 Sales ₹ ? Profit/Volume Ratio (P/V ratio) 50% 37.5% Margin of Safety sales as a % of total sales 40% 21.875% There has been substantial savings in the fixed cost in the year 2020-21 due to the restructuring process. The company could maintain its sales quantity level of 2019-20 in 2020-21 by reducing selling price. You are required to calculate the following: (i) Sales for 2020-21 in Value, (ii) Break-even sales for 2020-21 in Value, (iii) Fixed cost for 2020-21 in Value. [ICAI Module] Answer: Total Variable cost in 2019-20 = Sales – P/V Ratio = ₹ 8,00,000 – 50% = ₹ 4,00,000 In 2020-21, sales quantity has not changed. Thus, variable cost in 2020-21 will remain the same i.e. ₹ 4,00,000. P/V ratio (2020-21) = 37.50% Thus, Variable cost ratio = 10096 – 37.596 = 62.5% (i) Thus, sales in 2020-21 = $$\frac{4,00,000}{62.5 \%}$$ = ₹ 6,40,000 In 2020-21, Break-even sales = 100% – 21.875% (Margin of safety) = 78.125% (ii) Break-even sales in 2020-21: In 2020-21, Break-even sales = 10096 – 21.87% – 6 (Margin of safety) = 78.125% = 6,40,000 × 78.1259c = ₹ 5,00,000 (iii) Fixed cost in 2020-21 = B.E. sales × P/V ratio = ₹ 5,00,000 × 37.5096 = ₹ 1,87,500. Question 4. Following information is available for the 1st and 2nd quarter of the year 2020-21 of ABC Ltd:  Production (in units) Semi-variable cost (₹) Quarter I 36,000 2,80,000 Quarter II 42,000 3,10,000 You are required to segregate the semi-variable cost and calculate: (a) Variable cost per unit; (b) Total fixed cost. [CA Inter May 2009, 2 Marks] Answer:  Production (in units) Semi-variable cost (₹) Quarter I 36,000 2,80,000 Quarter II 42,000 3,10,000 Variable Cost per Unit = $$\frac{\text { Change in Semi Variable Cost }}{\text { Change in Production }}$$ = $$\frac{₹ 30,000}{6000 \text { units }}$$ = ₹ 5perunit Total Fixed Cost = Semi Variable Cost – (Production × Variable Cost per Unit) = ₹ 2,80,000 – (36,000 units × ₹ 5 per unit) = ₹ 2,80,000 – ₹ 1,80,000 = ₹ 1,00,000 Question 5. PQ Ltd. reports the following cost structure at two capacity levels;  (100% capacity) 2,000 units (75% capacity) 1,590 units Production overhead I ₹ 3 per unit ₹ 4 per unit Production overhead II ₹ 2 per unit ₹ 2 per unit If the selling price, reduced by direct material and labour is ₹ 8 per unit, what would be its break-even point? [CA Inter Nov. 2008, 3 Marks] Answer: Computation of Break-even point in units:  2,000 units 1,500 units Production Overhead I: Fixed Cost (₹) 6,000 (2,000 unit × ₹ 3 per unit) 6,000 (1,500 unit × ₹ 4 per unit) Selling price – Material and labour (₹) (A) 8 8 Production Overhead II (Variable Overhead) (B) 2 2 Contribution per unit (A)-(B) 6 . 6 Break-even point = $$\frac{\text { Fixed cost }}{\text { Contribution per unit }}=\frac{6,000}{6}$$ = 1,000 units Question 6. A Company sells two products, J and K. The sales mix is 4 units of J and 3 units of K. The contribution margins per unit are ₹ 40 for J and ₹ 20 for K. Fixed costs are ₹ 6,16,000 per month. Compute the break-even point. [CA Inter Nov. 2009, 2 Marks] Answer: Let 4a = No. of units of J Then, 3a = No. of units of K Units Break-even point of Product J = 4 × 2,800 = 11,200 units Break-even point of Product K = 3 × 2,800 = 8,400 units Question 7. PVC Ltd. sold 55,000 units of its product at ₹ 375 per unit. Variable costs are ₹ 175 per unit (manufacturing costs of ₹ 140 and selling cost ₹ 35 per unit). Fixed costs are incurred uniformly throughout the year and amount to ₹ 65,00,000 (including depreciation of ₹ 15,00,000). There is no beginning or ending inventories. Required: (i) Compute break even sales level quantity and cash break-even sales level quantity. (ii) Compute the P/V ratio. (iii) Compute the number of units that must be sold to earn an income (EBIT) of ₹ 5,00,000. (iv) Compute the sales level achieve an after-tax income (PAT) of ? 5,00,000, assume 40% corporate tax rate. [CA Inter Nov. 2019, RTPJ Answer: Contribution per unit = ₹ 375 – ₹ 175 = ₹ 200 (iii) No. of units that must be sold to earn an Income (EBIT) of ₹ 2,50,000 = $$\frac{\text { Fixed cost }+ \text { Desired EBIT }}{\text { Contribution margin per unit }}$$ = $$\frac{₹ 65,00,000+₹ 5,00,000}{₹ 200}$$ = 35,000 units (iv) After Tax Income (PAT) = ₹ 5,00,000 Tax rate = 40% Desired level of Profit before tax = ₹ 5,00,000/60 × 100 = ₹ 8,33,333/- = $$\frac{₹ 65,00,000+₹ 8,33,333}{53.33 \%}$$ = $$\frac{₹ 65,00,000+₹ 8,33,333}{53.33 \%}$$ = ₹ 1,37,50,859/- Question 8. MNP Ltd. sold 2,75,000 units of its product at ₹ 37.50 per unit. Variable costs are ₹ 17.50 per unit (manufacturing costs of ₹ 14 and selling cost ₹ 3.50 per unit). Fixed costs are incurred uniformly throughout the year and amount to ₹ 35,00,000 (including depreciation of ₹ 15,00,000). There is no beginning or ending inventories. Required: (i) Estimate break-even sales level quantity and cash break-even sales level quantity. (it) Estimate the P/V ratio. (iii) Estimate the number of units that must be sold to earn an income (EBIT) of ₹ 2,50,000. (iv) Estimate the sales level achieve an after-tax income (PAT) of ₹ 2,50,000, Assume 40% corporate Income Tax rate. [CA Inter Nov. 2010, 8 Marks] Answer: Contribution per unit = ₹ 37.50 – ₹ 17.50 = ₹ 20 (i) Break-even Sales Quantity (iii) No. of units that must be sold to earn an Income (EBIT) of ₹ 2,50,000 = $$\frac{\text { Fixed cost }+ \text { Desired EBIT }}{\text { Contribution margin per unit }}$$ = $$\frac{₹ 35,00,000+₹ 2,50,000}{₹ 20}$$ = 1,87,500 units (iv) After Tax Income (PAT) = ₹ 2, 50,000 Tax rate = 40% Desired level of Profit before tax = ₹ 2,50,000/60 × 100 = ₹ 4,1.6,667/- Estimate Sales Level = $$\frac{\text { Fixed Cost }+ \text { Desired Profit }}{\mathrm{P} / \text { V ratio }}$$ = $$\frac{₹ 35,00,000+₹ 4,16,667}{53.33 \%}$$ = ₹ 73,43,750 /- Question 9. The P/V Ratio of Delta Ltd. is 50% and margin of safety is 40%, The company sold 500 units for ₹ 5,00,000. You are required to calculate: (i) Break-even point, and (ii) Sales in units to earn a profit of 10% on sales [CA Inter Nov. 2011, 5 Marks] Answer: (i) P/V Ratio = 50% Margin of Safety = 40% Calculation of Break Even Point (BEP) Margin of Safety Ratio = $$\frac{(\text { Sales }- \text { BEP }) \times 100}{\text { Sales }}$$ 40 = $$\frac{5,00,000-\mathrm{BEP}}{5,00,000}$$ × 100 BEP = ₹ 3,00,000 BEP Per Unit = 3,00,000/1000 = 300 Units (ii) Sales in units to earn a profit of 10 % on sales Let the sales be x Profit = 10% of x ie. 0.1x. Sales = $$\frac{\text { Fixed Cost }+ \text { Desired Profit }}{\text { P/V ratio }}$$ x = $$\frac{1,50,000+0.1 \mathrm{x}}{50 \%}$$ or x = ₹ 3,75,000 Sales (in units) = 3,75,000/1,000 = 375 Units Working Notes: 1. Selling Price = ₹ 5,00,000/₹ 500 = ₹ 1,000 per unit 2. Variable cost per unit = Selling Price – (Selling Price × P/V Ratio) = 1,000 – (1,000 × 50%) = ₹ 500 3. Profit at present level of sales Margin of Safety = 40% of Total sales = 40% of ₹ 5,00,000 = ₹ 2,00,000 Profit = Margin of Safety × P/V Ratio = ₹ 2,00,000 × 50% = ₹ 1,00,000 4. Fixed Cost = (Sales × P/V Ratio) – Profit = (5,00,000 × 50%) – 1,00,000 = ₹ 1,50,000 Question 10. Omega Ltd. manufactures a product, currently utilising 75% capacity with a turnover of ₹ 99,00,000 at ₹ 275 per unit. The cost data is as under:  Direct Material per unit 96 Direct wages per unit 42 Variable overhead per unit 18 Semi- variable overheads 7,32,000 P/V ratio 40% Fixed overhead cost is ₹ 28,81,000 upto 80% level of activity, beyond this level an additional ₹ 2,38,500 will be incurred. Required: (i) Break even point in units and activity level at Break even point. (ii) Number of units to be sold to earn profit of ₹ 25 per unit. [Inter CA May 2019. 5 Marks] Answer: Contribution per unit = ₹ 275 × 40% = ₹ 110 Total Variable cost per unit = ₹ 275 – ₹ 1 10 = ₹ 165 Semi-variable cost per unit: = Total variable cost – (Direct Material + Direct wages + Variable Overheads) = ₹ 165 – (96 + 42 + 18) = ₹ 9 per unit Total fixed cost: = Fixed cost part of semi-variable cost + Fixed overheads = (Semi variable overheads at 75% level – Variable cost part) + Fixed Over heads =[₹ 7,32,000 – (₹ 9 × 36,000 units)] + ₹ 28,81,000 – ₹ 4,08,000 + ₹ 28,81,000 = ₹ 32,89,000 (i) Calculation of Break-even point BEP (in units) = $$\frac{\text { Total fixed cost }}{\text { Contribution per unit }}=\frac{₹ 32,89,000}{₹ 110}$$ = 29,900 units Activity level = $$\frac{29,900}{48,000}$$ × 100 = 62.29% (ii) Number of units to be sold to earn profit of ₹ 25 per unit: No.of units = $$\frac{\text { Total fixed cost at } 75 \% \text { level }}{\text { Contribution per unit }- \text { Desired profit per unit }}$$ = $$\frac{₹ 32,89,000}{₹ 110-₹ 25}$$ = 38,694 units Activity level = $$\frac{38,694}{48,000}$$ × 100 = 80.61% This is more than 80% capacity level, hence fixed overheads would increase by ₹ 2,38,500 and so the Break-even point. BEP = $$\frac{\text { Total fixed cost beyond } 80 \% \text { level }}{\text { Contribution per unit }- \text { Desired profit per unit }}$$ = $$\frac{₹ 32,89,000+₹ 2,38,500}{₹ 110-₹ 25}$$ = 41,500 units Question 11. ABC Limited started its operations in the year 2019 with a total production capacity of 2,00,000 units. The following information, for two years, are made available to you:  Year 2019 Year 2020 Sales (units) 80,000 1,20,000 Total Cost (₹) 34,40,000 45,60,000 There has been no change in the cost structure and selling price and it is anticipated that it will remain unchanged in the year 2021 also. Selling price is ₹ 40 per unit. Calculate: (i) Variable cost per unit. (ii) Profit Volume Ratio. (iii) Break-Even Point (in units) (iv) Profit if the firm operates at 75% of the capacity. [CA Inter May 2015, May 2013, 5 Marks] Answer: (iii) Fixed Cost = Total Cost in 2019 – Total Variable Cost in 2019 = ₹ 34,40,000 – (₹ 28 × 80,000 units) = ₹ 34,40,000 – ₹ 22,40,000 = ₹ 12,00,000 Break Even Point (in units) = $$\frac{\text { Fixed cost }}{\text { Contribution per unit }}$$ = $$\frac{\text { Fixed cost }}{\text { Contribution per unit }}$$ = 1,00,000 units (iv) Profit if the firm operates at 75% of the capacity: Number of units to be produced and sold = 2,00,000 units × 75% = 1,50,000 units Profit = Total contribution – Fixed Cost = (₹ 12 × 1,50,000 units) – ₹ 12,00,000 = ₹ 18,00,000 – ₹ 12,00,000 = ₹ 6,00,000 Question 12. A company gives the following information:  Margin of Safety ₹ 3,75,000 Total Cost ₹ 3,87,500 Margin of Safety (Qty.) 15,000 units Break Even Sales in Units 5,000 units You are required to calculate: (i) Selling price per unit (ii) Profit (iii) Profit/Volume Ratio (iv) Break-even Sales (in Rupees) (v) Fixed Cost [CA Inter Nov. 2019. Nov. 2015, 5 Marks] Answer: (i) Selling Price per unit = $$\frac{\text { Margin of Safety in Rupee value }}{\text { Margin of Safety in Quantity }}$$ = $$\frac{₹ 3,75,000}{15,000 \text { units }}$$ = ₹ 25 (ii) Profit = Sales Value – Total Cost = [Selling price per unit × (BEP units + MoS units)] – Total Cost = [₹ 25 × (5,000 + 15,000) units] – ₹ 3,87,500 = ₹ 5,00,000 – ₹ 3,87,500 = ₹ 1,12,500 (iv) Break-even Sales (in ₹) = BEP units × Selling Price per unit = 5,000 units × ₹ 25 = ₹ 1,25,000 (v) Fixed Cost = Break-even Sales (in ₹) × P/V Ratio = ₹ 1,25,000 × 30% = ₹ 37,500 Question 13. When volume is 4,000 units; average cost is ₹ 3.75 per unit. When volume is 5,000 units, average cost is ₹ 3.50 per unit. The Break-Even point is 6,000 units. Calculate: (i) Variable Cost per unit (ii) Fixed Cost and (iii) Profit Volume Ratio. [CA Inter Nov. 2019, 5 Marks] Answer: Question 14. During a particular period ABC Ltd. has furnished the following data: Sales ₹ 10,00,000 Contribution to sales ratio 37% and Margin of safety is 25% of sales. A decrease in selling price and decrease in the fixed cost could change the “contribution to sales ratio” to 30% and “margin of safety” to 40% of the revised sales. Calculate: (i) Revised Fixed Cost; (ii) Revised Sales; and (iii) New Break-Even Point. [CA Inter Jan. 2021, 5 Marks] Answer: Contribution to sales ratio (P/V ratio) = 37% Variable cost ratio = 100% – 37% = 63% Variable cost = ₹ 10,00,000 × 63% = ₹ 6,30,000 After decrease in selling price and fixed cost, sales quantity has not changed. Thus, variable cost is ₹ 6,30,000. Revised Contribution to sales =30% Thus, Variable cost ratio = 100% – 30% = 70% Revised, Break-even sales ratio = 100% – 40% (revised Margin of safety) = 60 (i) Revised fixed cost = Revised break even sales × Revised contribution to sales ratio = (₹ 9,00,000 × 60%) × 30% = 5,40,000 × 30% = ₹ 1,62,000 (ii) Revised sales = ₹ 6,30,000/70% = ₹ 9,00,000 (iii) Revised Break-even point = Revised sales × Revised break-even sales ratio = ₹ 9,00,000 × 60% = ₹ 5,40,000 Question 15. AZ company has prepared its budget for the production of 2,00,000 units. The variable cost per unit is ₹ 16 and fixed cost is ₹ 4 per unit. The company fixes its selling price to fetch a profit of 20% on total cost. You are required to calculate: (i) Present break-even sales (in ₹ and in quantity). (ii) Present profit-volume ratio. (iii) Revised break-even sales in ₹ and the revised profit-volume ratio, if it reduces its selling price by 10%. (iv) What would be revised sales in quantity and the amount, if a company desires a profit increase of 20% more than the budgeted profit and selling price is reduced by 10% as above in point (iii). [CA Inter Dec. 2021, 10 Marks] Answer: Total Cost = Variable cost + Fixed Cost = ₹ 16 + ₹ 4 = ₹ 20 per unit Total Fixed Cost = 2,00,000 units × ₹ 4 per unit = ₹ 8,00,000 Profit = 2096 on total cost = ₹ 20 × 20% = ₹ 4 per unit Selling Price = Total Cost + Profit = ₹ 20 + ₹ 4 = ₹ 24 per unit Contribution = Selling Price – Variable cost = ₹ 24 – ₹ 16 = ₹ 8 per unit (i) Present Break-even Sales (Quantity) = $$\frac{\text { Fixed Cost }}{\text { Contribution per unit }}$$ = $$\frac{₹ 8,00,000}{₹ 8}$$ = 1,00,000 Present Break-even Sales (₹) = 1,00,000 units × ₹ 24 = ₹ 24,00,000 (ii) Present P/V ratio = $$\frac{\text { Contribution per unit }}{\text { Selling price per unit }}$$ × 100 = $$\frac{₹ 8}{₹ 24}$$ × 100 = 33.33% (iii) Revised S.P ₹ 24 – 10% = ₹ 21.60 per unit Revised Contribution = ₹ 21.60 – ₹ 16 = ₹ 5.60 per unit Revised P/V Ratio $$\frac{₹ 5.60}{₹ 21.60}$$ × 100 = 25.926% Revised Break-even Sales (₹) = $$\frac{\text { Fixed Cost }}{\text { Revised P/V Ratio }}$$ = $$\frac{₹ 8,00,000}{25.926 \%}$$ = ₹ 30,85,705 (iv) Present Profit = ₹ 4 × 2,00,000 units = ₹ 8,00,000 Desired Profit = ₹ 8,00,000 + 20% = ₹ 9,60,000 Sales Required (units) = $$\frac{\text { Total Fixed Cost }+ \text { Desired Profit }}{\text { Contribution per unit }}$$ = $$\frac{₹ 8,00,000+₹ 9,60,000}{₹ 5.60}$$ = 3,14,286 units Sales Required (₹) = 3,14,286 units × ₹ 21.60 = ₹ 67,88,578 Question 16. A company produces single product which sells for ₹ 20 per unit. Variable cost is ₹ 15 per unit and Fixed overhead for the year is ₹ 6,30,000. Required: (a) Calculate sales value needed to earn a profit of 10% on sales. (b) Calculate sales price per unit to bring BEP down to 1,20,000 units (c) Calculate margin of safety sales if profit is ₹ 60,000. [CA Inter Nov. 2007, 3 Marks] Answer: (a) Suppose sales units are x then Sales revenue = 20x Total contribution = (₹ 20 – ₹ 15) x = 5x Total profit = (20 × 10%) x = 2x P/V ratio = $$\frac{\text { Total contribution } \times 100}{\text { Sales revenue }}=\frac{5 x}{20 x}$$ × 100 = 25% Total contribution = Total fixed cost + Total profit 5x = 6,30,000 + 2x 3x = 6,30,000 ∴ x = 6,30,000/3 = 2,10,000 units Sales value = 2,10,000 × 20 = ₹ 42,00,000 (b) Sales price to down BEP = 1,20,000 units Contribution per unit = $$\frac{\text { Total fixed cost }}{\text { Break Even Point }}$$ = $$\frac{₹ 6,30,000}{1,20,000 \text { units }}$$ = ₹ 5.25 Sales price = Variable cost per unit + Contribution per unit = ₹ 15 + ₹ 5.25 = ₹ 20.25 (c) Margin of Safety Sales = $$\frac{\text { Profit }}{\mathrm{P} / \mathrm{V} \text { ratio }}$$ = $$\frac{₹ 60,000}{25 \%}$$ = ₹ 2,40,000 Question 17. A company has fixed cost of ₹ 90,000, Sales ₹ 3,00,000 and Profit of ₹ 60,000. Required: (i) Sales volume it’ in Ihe next period, the company suffered a loss of ₹ 30,000. (ii) What is the margin of safety for a profit of ₹ 90,000? [CA Inter May 2008, 3 Marks] Answer: Total contribution = Total fixed cost + Total profit = ₹ 90,000 + ₹ 60,000 = ₹ 1,50,000 Question 18. SHA Limited provides the following trading results:  Year Sale Profit 2019-20 ₹ 25,00,000 10% of sale 2020-21 ₹ 20,00,000 8% of sale You are required to calculate: (i) Fixed Cost (ii) Break Even Point (iii) Amount of profit, if sale is ₹ 30,00,000 (iv) Sale, when desired profit is ₹ 4,75,000 (v) Margin of Safety at a profit of ₹ 2,70,000 [CA Inter May 2014, 5 Marks] Answer: Profit in year 2019-20 = ₹ 25,00,000 × 10% = ₹ 2,50,000 Profit in year 2020-21 = ₹ 20,00,000 × 8% = ₹ 1,60,000 So, P/V Ratio = $$\frac{\text { Change in profit (loss) } \times 100}{\text { Change in sales }}$$ = $$\frac{(₹ 2,50,000-₹ 1,60,000) \times 100}{(₹ 25,00,000-₹ 20,00,000)}$$ = $$\frac{₹ 90,000 \times 100}{₹ 5,00,000}$$ = 18% (i) Fixed Cost = Contribution (in year 2019-20) – Profit (in year 2019-20) = (Sales × P/V Ratio) – ₹ 2,50,000 = (₹ 25,00,000 × 18%) – ₹ 2,50,000 = ₹ 4,50,000 – ₹ 2,50,000 = ₹ 2,00,000 (ii) Break-even Point (in Sales) = $$\frac{\text { Fixed Cost }}{\text { P V Ratio }}$$ = $$\frac{\text { Fixed Cost }}{\text { P V Ratio }}$$ = ₹ 11,11,111 (Approx) (iii) Calculation of profit, if sale is ₹ 30,00,000 Profit = Contribution – Fixed Cost = (Sales × P/V Ratio) – Fixed Cost = (₹ 30,00,000 × 18%) – ₹ 2,00,000 = ₹ 5,40,000 – ₹ 2,00,000 = ₹ 3,40,000 So profit is ₹ 3,40,000, if Sale is ₹ 30,00,000. (iv) Calculation of Sale, when desired Profit is ₹ 4,75,000 Contribution Required = Desired Profit + Fixed Cost = ₹ 4,75,000 + ₹ 2,00,000 = ₹ 6,75,000 Sales = $$\frac{\text { Contribution }}{\mathrm{P} / \mathrm{V} \text { Ratio }}$$ = $$\frac{\text { Contribution }}{\mathrm{P} / \mathrm{V} \text { Ratio }}$$ = ₹ 37,50,000 Sales is ₹ 37,50,000 when desired profit is ₹ 4,75,000. (v) Margin of Safety = $$\frac{\text { Profit }}{\mathrm{P} / \mathrm{V} \text { ratio }}$$ = $$\frac{2,70,000}{18 \%}$$ = ₹ 15,00,000 So Margin of Safety is ₹ 15,00,000 at a profit of ₹ 2,70,000 Question 19. A company has introduced a new product and marketed 20,000 units. Variable cost of the product is ₹ 20 per units and fixed overheads are ₹ 3,20,000. You are required to: (i) Calculate selling price per unit to earn a profit of 10% on sales value, – BEP and Margin of Safety? (if) If the selling price is reduced by the company by 10%, demand is expected to increase by 5,000 units, then what will be its impact on Profit, BEP and Margin of Safety? (iii) Calculate Margin of Safety if profit is ₹ 64,000 [CA Inter Nov. 2016, 8 Marks] Answer: (i) Let ‘X’ be the selling price per unit: Sales value = Variable Cost + Fixed Cost + Profit 20,000 units × X = (₹ 20 × 20,000 units) + ₹ 3,20,000 + (10% of 20,000 units × X) Therefore, Selling price per unit = ₹ 40 Contribution per unit = Selling price per unit – variable cost per unit = ₹ 40 – ₹ 20 = ₹ 20 P/V ratio = $$\frac{\text { Contribution per unit }}{\text { Selling price per unit }}$$ × 100 = $$\frac{₹ 20}{₹ 40}$$ × 100 = 50% = (₹ 40 × 20,000 units) – (₹ 20 × 20,000 units) – 3,20,000 Break-even Point (in units) = ₹ 80,000 = $$\frac{\text { Fixed Overheads }}{\text { Contribution per unit }}$$ = $$\frac{₹ 3,20,000}{₹ 20}$$ = 16,000 units Break – even point (in value) = $$\frac{\text { Fixed Overheads }}{\text { P / V Ratio }}$$ = $$\frac{₹ 3,20,000}{50 \%}$$ = ₹ 6,40,000 Margin of Safety = Total sales value – Break-even sale = (₹ 40 × 20,000) – ₹ 6,40,000 = ₹ 1,60,000 (ii) Profitability Statement  ₹ Sales Value (7 36 X 25,000 units) 9,00,000 Variable Cost (7 20 X 25,000 units) (5,00,000) Contribution 4,00,000 Fixed overheads (3,20,000) Profit 80,000 Impact on Profit: Though there is no impact on the total profit amount but the rate of profit is decreased from 10% to 8.89% (80,000/9,00,000 × 100). Break-even Point (in units) = $$\frac{\text { Fixed Overheads }}{\text { Contribution per unit }}$$ = $$\frac{₹ 3,20,000}{₹ 36-₹ 20}$$ = 20,000 units Break-even point (in value) = Selling price per unit × BEP = ₹ 36 × 20,000 units = ₹ 7,20,000 Impact on Break-even point (BEP): The Break-even point is increased by 4,000 units (20,000 units – 16,000 units) or by 7 80,000 (7 7,20,000 – 7 6,40,000). Impact on Margin of Safety = Total sales value – Break-even sale = ₹ 9,00,000 – ₹ 7,20,000 = ₹ 1,80,000 Margin of safety is increased by ₹ 20,000 (₹ 1,80,000 – ₹ 160,000) or 1,000 units (5,000 units – 4,000 units) (iii) Margin of Safety when, profit is ₹ 64,000: = $$\frac{\text { Profit }}{\mathrm{P} / \mathrm{V} \text { ratio }}=\frac{₹ 64,000}{50 \%} .$$ = ₹ 1,28,000 Question 20. Following figures have been extracted from the books of M/s. RST Private Limited:  Financial Year’ Sales Profit/Loss 2019-20 4,00,000 15,000 (loss) 2020-21 5,00,000 15,000 (profit) You are required to calculate: (i) Profit Volume Ratio (ii) Fixed Costs (iii) Break Even Point (iv) Sales required to earn a profit of 45,000. (v) Margin of Safety in Financial Year 2020-21. [CA Inter May 2018, 5 Marks] Answer:  Year Sales Profit/Loss 2019-20 ₹ 4,00,000 ₹ (15,ooo) 2020-21 ₹ 5,00,000 ₹ 15,000 Difference ₹ 1,00,000 ₹ 30,000 (i) Profit Volume Ratio: P/V Ratio = $$\frac{\text { Change in profit }(\text { loss }) \times 100}{\text { Change in sales }}$$ = $$\frac{₹ 30,000 \times 100}{₹ 1,00,000}$$ = 30% (ii) Fixed Costs:  ₹ Contribution in 2019-20 (₹ 4,00,000 × 30%) 1,20,000 Add: Loss in 2019-20 15,000 Fixed Cost 1,35,000 (iii) Break Even Point: Break Even Point = $$\frac{\text { Fixed Cost }}{\mathrm{P} / \mathrm{V} \text { Ratio }}$$ = $$\frac{₹ 1,35,000}{30 \%}$$ = ₹ 4,50,000 (iv) Sales required to earn a profit of ₹ 45,000 Total contribution = Total fixed cost + Total profit = ₹ 1,35,000 + ₹ 45,000 = ₹ 1,80,000 Sales revenue = $$\frac{\text { Total contribution }}{\mathrm{P} / \mathrm{V} \text { ratio }}$$ = $$\frac{₹ 1,80,000}{30 \%}$$ = ₹ 6,00,000 (v) Margin of Safety = $$\frac{\text { Profit }}{P / \text { V ratio }}$$ = $$\frac{15,000}{30 \%}$$ = ₹ 50,000 So Margin of Safety is ₹ 50,000 at a profit of ₹ 15,000 Question 21. MFN Limited started its operation in 2019 with the total production capacity of 2,00,000 units. The following data for two years is made available to you:  2019 2020 Sales units 80,000 1,20,000 Total Cost (₹) 34,40,000 45,60,000 There has been no change in the cost structure and selling price and it is expected to continue in 2021 as well. Selling price is ₹ 40 per unit. You are required to calculate: (i) Break-Even Point (in units) (ii) Profit at 75% of the total capacity in 2021 [CA Inter May 2013, 5 Marks] Answer: (i) Break-even point: Variable cost per unit = $$\frac{\text { Change in total cost }}{\text { Change in unts }}$$ = $$\frac{₹ 45,60,000-₹ 34,40,000}{1,20,000-80,000}$$ = ₹ 28 per unit Total Fixed Cost = ₹ 45,60,000 – (1,20,000 × ₹ 28) = ₹ 12, 00, 000 Break-even point in units = $$\frac{\text { Fixed cost }}{\text { Contribution per unit }}=\frac{₹ 12,00,000}{₹ 40-₹ 28}$$ = 1,00,000 units (ii) Profit at 75% of the total capacity: Capacity at 75% = 2,00,000 units × 75% = 1,50,000 units Contribution per unit ₹ 12 Contribution (₹) 1,50,000 × ₹ 12 = ₹ 18,00,000 Fixed Cost = ₹ 12,00,000 Profit = Contribution – Fixed Cost = ₹ 18,00,000 – 12,00,000 = ₹ 6,00,000 Question 22. A manufacturing company is producing a product ‘A’ which is sold in the market at ₹ 45 per unit. The company has the capacity to produce 40,000 units per year. The budget for the year 2020-21 projects a sale of 30,000 units. The costs of each unit are expected as under:  ₹ Materials 12 Wages 9 Overheads 6 Margin of safety is ₹ 4,12,500. You are required to: (i) Calculate fixed cost and break-even point. (ii) Calculate the volume of sales to earn profit of 20% on sales. (iii) If management is willing to invest ₹ 10,00.000 with an expected return of 20%, calculate units to be sold to earn this profit. (iv) Management expects additional sales if the selling price is reduced to ₹ 44. Calculate units to be sold to achieve the same profit as desired in above (iii). [CA Inter Nov 2018, 10 Marks] Answer: Contribution per unit = Selling price per unit – Variable cost per unit = ₹ 45 – (₹ 12 + ₹ 9 + ₹ 6) = ₹ 18 P/V ratio = $$\frac{\text { Contribution per unit }}{\text { Selling price per unit }}$$ × 100 = $$\frac{₹ 18}{₹ 45}$$ × 100 = 40% Margin of Safety = $$\frac{\text { Profit }}{\mathrm{P} / \mathrm{V} \text { Ratio }}$$ 4, 12 , 500 = $$\frac{\text { Profit }}{40 \%}$$ Profit = 4,12,500 × 40% = 1,65,000 (i) Fixed Cost Profit = Total contribution – Fixed Cost Profit = (Sales × P/V Ratio) – Fixed Cost 1,65,000 = [(30,000 × 45) × 40%] – Fixed Cost Fixed Cost = ₹ 5,40,000 – ₹ 1,65,000 = ₹ 3,75,000 Break-even Point = Total Sales – Margin of Safety = (30,000 × ₹ 45) – ₹ 4,12,500 = ₹ 13,50,000 – ₹ 4,12,500 = ₹ 9,37,500 (ii) Volume of sales to earn profit of 20% on sales: Let sales volume be ‘S’ units. Therefore, total sales value will be 45S and Contribution will be 18S Contribution = Fixed Cost + Desired Profit 18S = 3,75,000 + (20% of 45S) 18S = 3,75,000 + 9S = 3,75,000 9S = 3,75,000 So, S = $$\frac{3,75,000}{9}$$ = 41666.67 Units Volume of sales = Contribution per unit × Selling price per unit = 41666.67 Units × 45 = ₹ 18,75,000 So, ₹ 18,75,000 sales are required to earn profit on 20% of sales (iii) Calculation of No. of units to be sold to earn 20% return on investment Contribution = Fixed Cost + Desired Profit 18S = 3,75,000 + Return on Investment 18S = 3,75,000 + 2,00,000 (ie. ₹ 10,00,000 × 20%) S = $$\frac{5,75,000}{18 \text { Units }}$$ = 31,945 Units (approx.) So, 31,945 Units to be sold to earn a return of ₹ 2,00,000. (iv) When selling price reduced to ₹ 44 per unit to earn same profits as above Revised Contribution = Fixed Cost + Desired Profit (₹ 44 – ₹ 27)S = 3,75,000 + 2, 00,000 17S = 5,75,000 S = $$\frac{5,75,000}{17 \text { Units }}$$ = 33,824 units (approx.) Additional Sales to be sold to achieve the same profit is 33,824 Units. Question 23. A company is producing an identical product in two factories. The following are the details in respect of both factories:  Factory X Factory Y Selling price per unit (₹) 50 50 Variable cost per unit (₹) 40 35 Fixed cost (₹) 2.00.000 3,00,000 Depreciation included in above fixed cost (₹) 40,000 30,000 Sales in units 30,000 20,000 Production capacity (units) 40,000 30,000 You are required to determine: (i) Break Even Point (BEP) each factory individually. (ii) Cash break even point for each factory individually. (iii) BEP for company as a whole, assuming the present product mix is in sales ratio, (iv) Consequence on profit and BEP if product mix is changed to 2:3 and total demand remain same. [CA Inter May 2018, 8 Marks] Answer: (iv) New Sales Mix Factory X = 50,000 × $$\frac{2}{5}$$ = 20,000 units Factory Y = 50,000 × $$\frac{3}{5}$$ = 30,000 units Calculation of Composite contribution = 10 × $$\frac{2}{5}$$ + 15 × $$\frac{3}{5}$$ = 4 + 9 = ₹ 13 Consequence on profit  Existing Mix New Mix Contribution 6,00,000 (50,000 × 12) 6,50,000 (50,000 × 13) Less: Fixed Cost 5,00,000 5,00,000 Profit 1,00,000 1,50,000 ∴ Increase in profit = ₹ 1,50,000 – ₹ 1,00,000 = ₹ 50,000 Consequence on BEP New BEP as a whole = $$\frac{\text { Complete Fixed Cost }}{\text { Composite Contribution }}$$ = $$\frac{5,00,000}{13}$$ = 38,462 units So, BEP Reduced by 3,205 units (41,667 – 38,462) Question 24. Zed Limited sells its product at ₹ 30 per unit. During the quarter ending, it produced and sold 16,000 units and suffered a loss of ₹ 10 per unit. If the volume of sales is raised to 40,000 units, it can earn a profit of ₹ 8 per unit. You are required to calculate: (i) Break Even Point in Rupees. (ii) Profit if the sale volume is 50,000 units. (iii) Minimum level of production where the company needs not to close the production if unavoidable fixed cost is ₹ 1,50,000 [CA Inter Nov 2014, 5 Marks] Answer:  Units sold Sales value (₹) Profit/(loss) (₹) 16,000 units 4,80,000 (₹ 30 × 16,000 units) (1,60,000) (₹ 10 × 16,000 units) 40,000 units 12,00,000 (₹ 30 × 40,000 units) 3,20,000 (₹ 8 × 40,000 units) Total Contribution in case of 40,000 units = Sales Value × P/V Ratio = ₹ 12,00,000 × 66.67 = ₹ 8,00,000 So, Fixed cost = Contribution – Profit = ₹ 8,00,000 – ₹ 3,20,000 = ₹ 4,80,000 (i). Break-even Point in Rupees = $$\frac{\text { FIXed cost }}{\text { Contribution per unit }}$$ = $$\frac{4,80,000}{66.67 \%}$$ = ₹ 7,20,000 (ii) If sales volume is 50,000 units, then profit = (Sales Value × P/V Ratio) – Fixed Cost = (50,000 units × ₹ 30 × 66.67%) – ₹ 4,80,000 = ₹ 5,20,000 (iii) Minimum level of production where the company needs not to close the production, if unavoidable fixed cost is ₹ 1,50,000: = 16,500 units. At production level of ≥ 16,500 units, company needs not to close the production. Question 25. A company-manufactures radios, which are sold at ₹ 1,600 per unit. The total cost is composed of 30% for direct materials, 40% for direct w ages and 30% and in wage rates by 10% is expected in the forthcoming year, as a result of which the profit at current selling price may decrease by 40% of the present profit per unit. You are required to prepare a statement showing current and future profit at present Selling Price. How much Selling Price should be increased to maintain the present rate of profit? [CA Inter May 2001, 4 Marks] Answer: Let X be the cost, Y be the profit and ₹ 1,600 selling price per unit of radio manufactured by a company. Hence, X + Y = 1,600 ………….(i) Statement of present and future cost of a radio An increase in material price and wage rates resulted into a decrease in current profit by 40 per cent at present selling price; therefore we have: 1.13X + 0.6 Y= 1,600 …………(ii) On solving (i) and (ii) we get: X = ₹ 1,207.55 Y = ₹ 392.45 Current profit ₹ 392.45 or 32.5% of cost Future profit ₹ 235.47 Question 26. M.K. Ltd. manufactures and sells a single product X whose selling price is ₹ 40 per unit and the variable cost is ₹ 16 per unit. (i) If the Fixed Costs for this year are ₹ 4,80,000 and the annual sales are at 60% margin of safety, calculate the rate of net return on sales, assuming an income tax level of 40%. (ii) For the next year, it is proposed to add another product line Y whose selling price would be ₹ 50 per unit and the variable cost ₹ 10 per unit. The total fixed costs are estimated at ₹ 6,66,600. The sales mix values of X : Y would be 7 : 3. Determine at what level of sales next year, would M.K. Ltd. break even? Give separately for both X and Y the break-even sales in rupee and quantities. [ICAIModule] Answer: (i) Contribution per unit = Selling price – Variable cost = ₹40 – ₹ 16 = ₹ 24 Break-even Point = $$\frac{₹ 4,80,000}{₹ 24}$$ = 20, 000 units Margin of Safety = 60% Therefore, break even sales will be 40%. Total Sales = $$\frac{\text { Break-even Sales }}{40 \%}=\frac{20,000 \text { units }}{40 \%}$$ = 50,000 units  ₹ Sales Value (50,000 units x ? 40) 20,00,000 Less: Variable Cost (50,000 units x ? 16) 8,00,000 Contribution 12,00,000 Less: Fixed Cost 4,80,000 Profit 7,20,000 Less: Income Tax @ 40% 2,88,000 4,32,000 Rate of Net Return on Sales = 21.6%($$\frac{₹ 4,32,000}{₹ 20,00,000}$$ × 100) (ii) Computation of Break even sales of product X and product Y  X(₹) Y (₹) Selling Price 40 50 Less: Variable Cost 16 10 Contribution per unit 24 40 Weighted Contribution = $$\frac{24 \times 7+40 \times 3}{10}$$ = ₹ 28.8 per unit Total Break-even Point = $$\frac{\text { Total Fixed Cost }}{\text { Weighted Cost }}=\frac{6,66,600}{28.80}$$ = 23,145.80 units Break-even Point X = $$\frac{7}{10}$$ × 23,145.80 = 16,202 units or 16,202 × ₹ 40 = ₹ 6,48,080 Y = $$\frac{3}{10}$$ × 23,145.80 = 6,944 units or 6,944 × 50 = 3,47,200 Question 27. A company has three factories situated in North, East and South with its Head Office in Mumbai. The Management has received the following summary report on the operations of each factory for a period: Calculate the following for each factory and for the company as a whole for the period: (i) Fixed Cost (ii) Break-even Sales [CA Inter RTP Nov., 2021] Answer: Computation of Profit Volume (P/V) Ratio (₹ in ’000) (i) Computation of Fixed Costs (₹ in ’000) (ii) Computation of Break-Even Sales Question 28. Mega Company has just completed its first year of operations. The unit costs on a normal costing basis are as under:  ₹ Direct material 4 kg @ ₹ 4 16.0 Direct labour 3 hrs @ ₹ 18 54.00 Variable overhead 3 hrs @ ₹ 4 12.00 Fixed overhead 3 hrs @ ₹ 6 18.00 Selling and administrative costs: 100.00 Variable ₹ 20 per unit Fixed During the year the company has the following activity: ₹ 7,60,000 Units produced 24,000 Units sold 21,500 Unit selling price ₹ 168 Direct labour hours worked 72,000 Actual fixed overhead was ₹ 48,000 less than the budgeted fixed overhead. Budgeted variable overhead was ₹ 20,000 less than the actual variable overhead. The company used an expected actual activity level of 72,000 direct labour hours to compute the pre-determine overhead rates. Required: (i) Compute the unit cost and total income under: (a) Absorption costing (b) Marginal costing (ii) Under or over absorption of overhead. (iii) Reconcile the difference between the total income under absorption and marginal costing. [CA Inter .You 2009. 13 Marks] Answer: (i) Computation of Unit Cost & Total Income  Unit Cost Absorption Costing (₹) Marginal Costing (₹) Direct Material 16.00 16.00 Direct Labour 54.00 54.00 Variable Overhead (₹ 12 + ₹ 20,000/24,000) 12.83 12.83 Fixed Overhead 18.00 – Unit Cost 100.83 82.83 Income Statement (ii) Under or over absorption of overhead: (iii) Reconciliation of Profit: Difference in Profit = ₹ 3,02,083 – ₹ 2,57,083 = ₹ 45,000 This is due to Fixed Factory Overhead being included in Closing Stock in Absorption Costing and not in Marginal Costing. Therefore, Difference in Profit = Fixed Overhead Rate (Production – Sale) = ₹ 18 (24,000 -21,500) = ₹ 45,000 Working Note: Calculation of Cost of Goods Sold Question 29. A dairy product company manufacturing baby food with a shelf life of one year furnishes the following information: (i) On 1st January, 2021, the company has an opening stock of 20,000 packets whose variable cost is ₹ 180 per packet. (ii) In 2020, production was 1,20,000 packets and the expected production in 2021 is 1,50,000 packets. Expected sales for 2021 is 1,60,000 packets. (iii) In 2020, fixed cost per unit was ₹ 60 and it is expected to increase by 10% in 2021. The variable cost is expected to increase by 25%. Selling price for 2021 has been fixed at ₹ 300 per packet. You are required to calculate the Break-even volume in units for 2021. [CA Inter May 2016, 5 Marks] Answer: Calculation of Break-even Point (in units): Since, shelf life of the product is one year only, hence, opening stock is to be sold first.  ₹ Total Contribution required to recover total fixed cost in 2021 and to reach break-even volume. 79,20,000 Less: Contribution from opening stock (20,000 units × (₹ 300 – ₹ 180)} 24,00,000 Balance Contribution to be recovered 55,20,000 Units to be produced to get balance contribution = $$\frac{\text { Balance Contribution to be recovered }}{\text { Contribution per unit }}$$ = $$\frac{₹ 55,20,000}{(₹ 300-₹ 225)}$$ = 73,600 packets. Break-even volume in units for 2021  Packets From 2021 production 73,600 Add: Opening stock from 2020 20,000 93,600 Working Notes:  2020 (₹) 2021 (₹) Fixed Cost 72,00,000 (₹ 60 × 1,20,000 units) 79,20,000 (110% of ₹ 72,00,000) Variable Cost 180 225 (125% of ₹ 180) Question 30. A company, with 90% Capacity utilization, is manufacturing a product and makes a sale of ₹ 9,45,000 at ₹ 30 per unit. The cost data is as under:  Materials ₹ 9.00 per unit Labour ₹ 7.00 per unit Semi variable cost (including variable cost of ₹ 4.25 per unit) ₹ 2,10,000. Fixed cost is ₹ 94,500 upto 90% level of output (capacity). Beyond this, an additional amount of ₹ 15,000 will be incurred. You are required to calculate: (i) Level of output at break-even point (ii) Number of units to be sold to earn a net income of 10% of sales (iii) Level of output needed to earn a profit of ₹ 1,41,375 [CA Inter Nov. 2017, 8 Marks] Answer: No. of units at 90% capacity utilization = $$\frac{\text { Sales Value }}{\text { Selling price per unit }}$$ = $$\frac{₹ 9,45,000}{₹ 30}$$ = 31,500 units Calculation of Contribution per unit:  ₹ Material 9.00 Labour cost 7.00 Variable overheads 4.25 Total Variable Cost 20.25 Selling price 30.00 Contribution per unit (Selling price – Variable Cost) 9.75 Calculation of Total Fixed Cost  ₹ Semi-variable cost 2,10,000 Less: Variable cost (31,500 units × ₹ 4.25) 1,33,875 Fixed Cost 76,125 Add: Fixed cost upto 90% level 94,500 Total Fixed Cost 1,70,625 (i) Break-even point = $$\frac{\text { Total Fixed Cost }}{\text { Contribution per unit }}$$ = $$\frac{₹ 1,70,625}{₹ 9.75}$$ = 17,500 Units At 17,500 units, output level is 50% (17,500/31,500 × 90%). This means that at 50% activities level, this company reaches at BEP. (ii) Number of units to be sold to earn a net income of 10% of sales 10% of sales = 10% of ₹ 30 = ₹ 3 per unit profit. Let us assume ‘S’ is the No. of units to be sold, hence profit will be 3S Sales (Units) = $$\frac{\text { Fixed Cost }+ \text { Profit }}{\text { Contribution per unit }}$$ S = $$\frac{₹ 1,70,625+3 S}{₹ 9.75}$$ 9.75 S = ₹ 1,70,625 + 3S S = $$\frac{₹ 1,70,625}{6.75}$$ = 25,278 units. (iii) Level of output needed to earn a profit of ₹ 1,41,375 Sales (units) = $$\frac{₹ 1,70,625+₹ 1,41,375}{₹ 9.75}$$ = 32,000 units 32,000 units is beyond 90% activity level. In such case, the fixed cost will be increased by ₹ 15,000 to ₹ 3,27,000. Then, S = $$\frac{₹ 3,27,000}{₹ 9.75}$$ = 33,538 units i.e. 33,538/35,000 × 100 = 95.82% activity level. Question 31. J Ltd. manufactures a Product-Y. Analysis of income statement indicated a profit of ₹ 250 lakhs on a sales volume of 5,00,000 units. Fixed costs are ₹ 1,000 lakhs which appears to be high. Existing selling price is ₹ 680 per unit. The company is considering revising the profit target to ₹ 700 lakhs. You are required to compute: (i) Break-even point at existing levels in units and in rupees. (ii) The number of units required to be sold to earn the target profit. (iii) Profit with 10% increase in selling price and drop in sales volume by 10%. (iv) Volume to be achieved to earn target profit at the revised selling price as calculated in (ii) above, if a reduction of 10% in the variable costs and ₹ 170 lakhs in the fixed cost is envisaged. [CA Inter Nov. 2020, RTP] Answer: Sales Volume 5,00,000 Units Computation of existing contribution  Per unit (₹) Total (₹ In lakhs) Sales (A) 680 3,400 Fixed Cost 200 1 ,000 Profit 50 250 Contribution (B) 250 1,250 Variable Cost [(A) – (B)] 430 2,150 (i) Break even sales (units) = $$\frac{\text { Cixed Cost }}{\text { Contribution per unit }}$$ = $$\frac{₹ 10,00,00,000}{₹ 250}$$ = 4,00,000 units Break even sales (₹) = 4,00,000 units × ₹ 680 = ₹ 2,720 lakhs (ii) Number of units sold to achieve a target profit of ₹ 700 lakhs: Desired Contribution = Fixed Cost + Target Profit = ₹ 1,000 lakhs + 700 lakhs = ₹ 1,700 lakhs Number of units to be sold = $$=\frac{\text { Desired Contribution }}{\text { Contribution per unit }}=\frac{₹ 17,00,00,000}{₹ 250}$$ = 6,80,000 units (iii) Profit if selling price is increased by 10% and sales volume drops by 10%: Existing Selling Price per unit = ₹ 680 = ₹ 680 × 110% – ₹ 748 = 5,00,000 units = 5,00,000 units – (10% of 5,00,000) = 4,50,000 units Statement of Profit at sales volume of 4,50,000 units @ 748 per unit (iv) Volume to be achieved to earn target profit of ₹ 700 lakhs with revised selling price and reduction of 10% in variable costs and ₹ 170 lakhs in fixed cost: Revised selling price per unit = ₹ 748 Variable costs per unit existing = ₹ 430 Revised Variable Costs = ₹ 430 – (10% of 430) = ₹ 430 – ₹ 43 = ₹ 387 Total Fixed Cost (existing) = ₹ 1,000 lakhs Reduction in fixed cost = ₹ 170 lakhs Revised fixed cost = ₹ 1,000 lakhs – ₹ 170 lakhs = ₹ 830 lakhs Revised Contribution (unit) = ₹ 748 – 1387 = ₹ 361 Desired Contribution = Revised Fixed Cost + Target Profit = ₹ 830 lakhs + ₹ 700 lakhs = ₹ 1,530 lakhs No.of units to be sold = $$\frac{\text { Desired Contribution }}{\text { Contribution per unit }}$$ = $$\frac{₹ 15,30,00,000}{₹ 361}$$ = 4,23,823 units Question 32. The following information was obtained from the records of a manufacturing unit:  ₹ ₹ Sales 80,000 units @ ₹ 25 20,00,000 Material consumed 8,00,000 Variable Overheads 2,00,000 Labour Charges 4,00,000 Fixed Overheads 3,60,000 17,60,000 Net Profit 2,40,000 Calculate: (i) The number of units by selling which the company will neither lose nor gain anything. (ii) The sales needed to earn a profit of 20% on sales. (iii) The extra units which should be sold to obtain the present profit if it is proposed to reduce the selling price by 20% and 25%. (iv) The selling price to be fixed to bring down its Break-even Point to 10,000 units under present conditions. [CA Inter May 2017, 8 Marks] Answer: (i) The number of units to be sold for neither loss nor gain i.e. Break-even units: = $$\frac{\text { Fixed Overheads }}{\text { Contribution per unit }}=\frac{₹ 3,60,000}{₹ 7.50}$$ = 48,000 units (ii) The sales needed to earn a profit of 20% on sales: Let desired total sales be X. Desired Sales = $$\frac{\text { Fixed Cost }+ \text { Desired Profit }}{\mathrm{P} / \mathrm{V} \text { ratio }}$$ X = $$\frac{₹ 3,60,000+0.2 \mathrm{X}}{30 \%}$$ or, 0.30X = 3,60,000 or, 0.10X = 3,60,000 or, X = ₹ 36,00,000 No. of units to be sold = $$\frac{36,00,000}{25}$$ = 1,44,000 units (iii) Calculation of extra units to be sold to earn present profit of ₹ 2,40,000 under the following proposed selling price: (iv) Sales price to bring down BEP to 10,000 units: B.E.P (Units) = $$\frac{\text { Fixed Cost }}{\text { Contribution per unit }}$$ Or Contribution per unit = $$\frac{₹ 3,60,000}{10,000 \text { units }}$$ = ₹ 36 So, Sales Price (per unit) = Variable Cost + Contribution = ₹ 17.5 + ₹ 36 = ₹ 53.50 Workings: Variable cost per unit = $$\frac{₹ 8,00,000+₹ 2,00,000+₹ 4,00,000}{80,000 \text { units }}$$ = ₹ 17.50 Contribution per unit = ₹ 25 – ₹ 17.50 = ₹ 7.50 P/V Ratio = $$\frac{\text { Contribution per unit }}{\text { Selling price per unit }}$$ × 100 = $$\frac{7.50}{25}$$ × 100 = 30% Question 33. LR Ltd. is considering two alternative methods to manufacture a new product it intends to market. The two methods have a maximum output of 50,000 units each and produce identical items with a selling price of ₹ 25 each. The costs are:  Method 1 Semi-Automatic (₹) Method 2 Fully-Automatic (₹) Variable cost per unit 15 10 Fixed costs 1,00,000 3,00,000 You are required to calculate: (1) Cost Indifference Point in units. Interpret your results. (2) The Break-even Point of each method in terms of units. Answer: Question 34. M/s Gaurav Private Limited is manufacturing and selling two products: ‘BLACK’ and ‘WHITE’ at selling price of ₹ 20 and ₹ 30 respectively. The following sales strategy has been outlined for the financial year 2020-21: (i) Sales planned for the year will be ₹ 81,00,000 in the case of ‘BLACK’ and ₹ 54,00,000 in the case of ‘WHITE’. (ii) The selling price of ‘BLACK’ will be reduced by 10% and that of ‘WHITE’ by 20%. (iii) Break-even is planned at 70% of the total sales of each product. (iv) Profit for the year to be maintained at ₹ 8,26,200 in the case of ‘BLACK’ and ₹ 7,45,200 in the case of ‘WHITE’. This would be possible by- reducing the present annual fixed cost of ₹ 42,00,000 allocated as ₹ 22,00,000 to ‘BLACK’ and ₹ 20,00,000 to ‘WHITE’. You are required to calculate: 1. Number of units to be sold of ‘BLACK’ and ‘WHITE’ to Break even during the financial year 2020-21. 2. Amount of reduction in fixed cost product-wise to achieve desired profit mentioned at (iv) above. [CA Inter May 2019, 3 Marks] Answer: (i) Statement showing Break Even Sales (ii) Statement Showing Fixed Cost Reduction Question 35. PH Gems Ltd. is manufacturing ready made suits. It has annual production capacity of 2,000 pieces. The Cost Accountant has presented following information for the year to the management:  ₹ ₹ Sales 1,500 pieces @ ₹ 1,800 per piece 27,00,000 Direct Material 5,94,200 Direct Labour 4,42,600 Overheads (40% Fixed) 11,97,000 22,33,800 Net Profit 4,66,300 Evaluate following options: (i) If selling price is increased by ₹ 200, the sales will come down to 60% of the total annual capacity. Should the company increase its selling price? (ii) The company can earn a profit of 20% on sales if the company provides TIEPIN with ready-made suit. The cost of each TIEPIN is ₹ 18. Calculate the sales to earn a profit of 20% on sales. [CA Inter May 2018, 10 Marks] Answer: (i) Evaluation of Option (i) Selling Price = ₹ 1800 + ₹ 200 = ₹ 2,000 Sales = 2000 × 60° = 1200 Pieces Yes, the company should increase its selling price. As at sales of 1,500 pieces it can earn profit of ₹ 310.8 per unit and at sales of 1,200 pieces it can earn profit of ₹ 431 per unit. (ii) Evaluation of Option (ii) Sales required to earn a profit of 20% Sales = $$\frac{₹ 4,78,800+0.20 \text { sales }}{34.00 \%}$$ 0.34 Sales = ₹ 4,78,000 + 0.20 sales Sales = ₹ 34,20,000 or 1,900 units (₹ 34,20,000/1800) To earn profit 20% on sales of readymade suit (along with TIEPIN) company has to sold 1,900 units i.e. 95% of the full capacity. This sales level of 1,900 units is justified only if variable cost is constant. Any upside in variable cost would impact profitability, to achieve the desired profitability. Production has to be increased but the scope is limited to 5% only. Question 36. PJ Ltd. manufactures hockey sticks. It sells the products at ₹ 500 each and makes a profit of ₹ 125 on each stick. The Company is producing 5,000 sticks annually by using 50% of its machinery capacity. The cost of each stick is as under:  Direct Material ₹ 150 Direct Wages ₹ 50 Works Overhead ₹ 125 (50% fixed) Selling Expenses ₹ 50 (25% variable) The anticipation for the next year is that cost will go up as under:  Fixed Charges 10% Direct Wages 20% Direct Material 5% There will not be any change in selling price. There is an additional order for 2,000 sticks in the next year. Calculate the lowest price that can be quoted so that the Company can earn the same profit as it has earned in the current year? [CA Inlet Nor. 2019, 10 Marks] Answer: Selling Price = ₹ 500 Profit = ₹ 125 No. of Sticks = 5,000 Let lowest price quoted be K Now, Sales = Target Profit + Variable Cost + Fixed Cost (5,000 × 500) + (2,000 × K) = (5,000 units × ₹ 125) + (7,000 units × ₹ 292.50) 25,00,000 + 2,000K = 6,25,000 + 20,47,500 + 5,50,000 = ₹ 361.25 So, Lowest Price that can be quoted to earn the profit of ₹ 6,25,000 (same as current year) is ₹ 361.25. Question 37. A Ltd. manufacture and sales Its. product R-9. .The following figures have been collected from cost records of last year for the product R-9:  Elements of Cost Variable Cost portion Fixed Cost Direct Material 30% of Cost of Goods Sold – Direct Labour 15% of Cost of Goods Sold – Factory Overhead 10% of Cos? of Goods Sold ₹ 2,30,000 Administration Overhead 2% of Cost of Goods Sold ₹ 71,000 Selling & Distribution Overhead 4% of Cost of Sales ₹ 68,000 Last Year 5,000 units were sold at ₹ 185 per unit. From the given, determine the followings: (i) Break-even Sales (in ₹) (ii) Profit earned during last year (iii) Margin of safety (in %) (iv) Profit if the sales were 10% less than the actual sales (Assume that Administration Overhead is related with production activity) [CA Inter RTF May 203,0] Answer: (i) Break-Even Sales = $$\frac{\text { Fixed cost }}{\mathrm{P} / \mathrm{V} \text { ratio }}$$ = $$\frac{₹ 3,69,000}{53.41 \%}$$ = ₹ 6,90,882 (ii) Profit earned during the last year = (Sales – Total Variable Costs) – Total Fixed Costs = (₹ 9,25,000 – ₹ 4,31,000) – ₹ 3,69,000 = ₹ 1,25,000 (iii) Margin of Safety (%) = $$\frac{\text { Sales }- \text { Break-even sales }}{\text { Sales }}$$ × 100 = $$\frac{₹ 9,25,000-₹ 6,90,882}{₹ 9,25,000}$$ × 100 = 25.3196 (iv) Profit if the sales were 10% less than the actual sales: Profit = 90% of (₹ 9,25,000 – ₹ 4,31,000) – ₹ 3,69,000 = ₹ 4,44,600 – ₹ 3,69,000 = ₹ 75,600 Working Notes: 1. Calculation of Cost of Goods Sold (COGS): COGS = Direct Material + Direct Labour + Factory Overhead + Administration Overhead COGS = [0.3 COGS + 0.15 COGS + (0.10 COGS + ₹ 2,30,000) + (0.02 COGS + ₹ 71,000)] COGS = 0.57 COGS + ₹ 3,01,000 COGS = $$\frac{₹ 3,01,000}{0.43}$$ = ₹ 7,00,000 2. Calculation of Cost of Sales (COS): COS = COGS + Selling & Distribution Overhead COS = COGS + (0.04 COS + ₹ 68,000) COS = ₹ 7,00,000 + (0.04 COS + ₹ 68,000) COS = $$\frac{₹ 7,68,000}{0.96}$$ = ₹ 8,00,000 Calculation of Variable Costs:  Direct Material (0.30 × ₹ 7,00,000) ₹ 2,10,000 Direct Labour (0.15 × ₹ 7,00,000) ₹ 1,05,000 Factory Overhead (0.10 × ₹ 7,00,000) ₹ 70,000 Administration OH (0.02 × ₹ 7,00,000) ₹ 14,000 Selling & Distribution OH (0.04 × ₹ 8,00,000) ₹ 32,000 ₹ 4,31,000 4. Calculation of total Fixed Costs:  Factory Overhead ₹ 2,30,000 Administration OH ₹ 71,000 Selling & Distribution OH ₹ 68,000 ₹ 3,69,000 5. Calculation of P/V Ratio: P/V Ratio = $$\frac{\text { Contribution }}{\text { Sales }}$$ × 100 = $$\frac{\text { Sales Variable Costs }}{\text { Sales }}$$ × 100 = $$\frac{(₹ 185 \times 5,000 \text { units })-4,31,000}{₹ 185 \times 5,000 \text { units }}$$ × 100 = 53.41% Question 38. The following figures are related to LM Limited for the year ending 31st March, 2021: Sales – 24,000 units @ ₹ 200 per unit; P/V Ratio 25% and Break-even Point 50% of sales. You are required to calculate: (i) Fixed cost for the year (ii) Profit earned for the year (iii) Units to be sold to earn a target net profit of ₹ 11,00,000 for a year. (iv) Number of units to be sold to earn a net income of 25% on cost. (v) Selling price per unit if Break-even Point is to be brought down by 4,000 units. [CA Inter Nov. 2012, 8 Marks] Answer: Break even point (in units) = 50% of sales = 12,000 units Break even point (in sales value) = 12,000 units × ₹ 200 = ₹ 24,00,000 (i) Break even sales = $$\frac{\text { Fixed Cost }}{\mathrm{P} / \mathrm{V} \text { ratio }}$$ or 24,00,000 = $$\frac{\text { Fixed cost }}{25 \%}$$ or Fixed Cost = ₹ 24,00,000 × 2596 = ₹ 6,00,000 So Fixed Cost for the year is ₹ 6,00,000 (ii) Contribution for the year = Total Sales × P/V Ratio = (24,000 units × ₹ 200) × 2596 = ₹ 12,00,000 Profit for the year = Contribution – Fixed Cost = ₹ 12,00,000 – ₹ 6,00,000 = ₹ 6,00,000 (iii) Target net profit is ₹ 11,00,000 Contribution per unit = 25% of ₹ 200 = ₹ 50 per unit No.of units to be sold = $$\frac{\text { Fixed Cost }+ \text { Desired Profit }}{\text { Contribution per unit }}$$ = $$\frac{₹ 6,00,000+₹ 11,00,000}{₹ 50}$$ = 34,000 units (iv) Let desired total sales be X, then desired profit is 25% on Cost or 20% on Sales i.e. 0.2X Fixed Cost + Desired Profit Desired Sales = $$\frac{\text { Fixed Cost }+ \text { Desired Profit }}{\mathrm{P} / \mathrm{V} \text { ratio }}$$ X = $$\frac{₹ 6,00,000+0.2 \mathrm{X}}{25 \%}$$ or, 0.25 X = 6,00,000 + 0.2X or, 0.05 X = 6,00,000 or, X = ₹ 1,20,00,000 No. of units to be sold – $$\frac{1,20,00,000}{200}$$ = 60,000 units (v) If Break even point is to be brought down by 4,000 units, then Breakeven point will be 12,000 units – 4000 units = 8000 units . B.E.P (Units) = $$\frac{\text { Fixed Cost }}{\text { Contribution per unit }}$$ Or, Contribution per unit = $$\frac{6,00,000}{8,000 \text { unit }}$$ = ₹ 75 So, Sales Price (per unit) = Variable Cost + Contribution = ₹ 150 + ₹ 75 = ₹ 225 Question 39. Two manufacturing companies A and B are planning to merge. The details are as follows:  A B Capacity utilisation (%) 90 60 Sales (₹) 63,00,000 48,00,000 Variable Cost (₹) 39,60,000 22,50,000 Fixed Cost (₹) 13,00,000 15,00,000 Assuming that the proposal is implemented, calculate: (i) Break-Even sales of the merged plant and the capacity utilization at that stage, (ii) Profitability of the merged plant at 80% capacity utilization (iii) Sales Turnover of the merged plant to earn a profit of ₹ 60,00,000. (iv) When the merged plant is working at a capacity to earn a profit of ₹ 60,00,000, what percentage of increase in selling price is required to sustain an increase of 5% in fixed overheads. [CA Inter January 2021, 10 Marks] Answer: P/V ratio of merged plant = $$\frac{\text { Contribution }}{\text { sales }}$$ × 100 = $$\frac{₹ 68,50,000}{1,50,00,000}$$ × 100 = 45.67% (i) Break-even sales of merged plant = $$\frac{\text { Fixed cost }}{\mathrm{P} / \mathrm{V} \text { ratio }}$$ = $$\frac{28,00,000}{45.67 \%}$$ = ₹ 61,30,939.34 (approx.) (ii) Profitability of the merged plant at 80% capacity utilisation = (₹ 1,50,00,000 × 80%) × P/V ratio – fixed cost = ₹ 1,20,00,000 × 45.67% – ₹ 28,00,000 = ₹ 26,80,400 (iii) Sales to earn a profit of ₹ 60,00,000 Desired sales = $$\frac{\text { Fixed Cost }+ \text { desired profit }}{\text { P / V Ratio }}$$ = $$\frac{₹ 28,00,000+₹ 60,00,000}{45.67 \%}$$ = ₹ 1,92,68,666 (approx.) (iv) Increase in fixed cost = ₹ 28,00,000 × 5% = ₹ 1,40,000 Therefore, percentage increase in sales price = $$\frac{₹ 1,40,000}{₹ 1,92,68,666}$$ × 100 = 0.726% (approx) Question 40. XYZ Ltd. is engaged in the manufacturing of toys. It can produce 4,20,000 toys at its 70% capacity on per annum basis. Company is in the process of determining sales price for the financial year 2020-21. It has provided the following information:  Direct Material ₹ 60 per unit Direct Labour ₹ 30 per unit Indirect Overheads Fixed ₹ 65,50,000 per annum Variable ₹ 15 per unit Semi-variable ₹ 5,00,000 per annum up to 60% capacity and ₹ 50,000 for every 5% increase in capacity or part thereof up to 80% capacity and thereafter ₹ 75,000 for every 10% increase in capacity or part thereof Company desires to earn a profit of ₹ 25,00,000 for the year. Company has planned that the factory will operate at 50% of capacity for first six months of the year and at 75% of capacity for further three months and for the balance three months, factory will operate at full capacity. You are required to: (1) Determine the average selling price at which each of the toys should be sold to earn the desired profit. (2) Given the above scenario, advise whether company should accept an offer to sell each Toy at: (a) 1130 per Toy (b) ₹ 129 per Toy (CA Inter January 2021, 10 MarksJ Answer: (1) Statement of Cost * ₹ 5,00,000 + [3 times (from 60% to 75%) × 50,000] = ₹ 6,50,000 ** ₹ 6,50,000 + [1 time (from 75% to 80%) × 50,000] + [2 times (from 80% to 100%) × 75,000] = ₹ 8,50,000 (2) Company Should accept the offer as it is above its targeted sales price of ₹ 128.45 per toy. Question 41. PQR Ltd. manufactures medals for winners of athletic events and other contests. Its manufacturing plant has the capacity to produce 10,000 medals each month. The company has current production and sales level of 7,500 medals per month. The current domestic market price of the medal is ₹ 150, The cost data for the month of August 2021 is as under:  ₹ Variable costs: Direct materials 2,62,500 Direct labour cost 3,00,000 Overhead 75,000 Fixed manufacturing costs 2,75,000 Fixed marketing costs 1,75,000 10,87,500 PQR Ltd, has received a special one-time only order for 2,500 medals at ₹ 120 per medal. Required: (i) Should PQR Ltd, accept the special order? Why? Explain briefly. (ii) Suppose the plant capacity was 9,000 medals instead of 10,000 medals each month. The special order must be taken either in full or rejected totally. Analyse whether PQR Ltd. should accept the special order or not. [ICAI Module] Answer: (z) Since, the offered price (₹ 120) for the additional demand of 2,500 medals is more than the variable cost per unit (₹ 85), the order will be accepted. Increase in profit by accepting order = (₹ 120 – ₹ 85) × 2,500 medals = ₹ 87,500 (ii) If the plant capacity is 9,000 medals, then by accepting special order of 2,500 medals, the company has to lose contribution on 1,000 medals from existing customers. By accepting the special order at ₹ 120 per unit, the total profit of the company is increased by ₹ 22,500 (₹ 60,000 – ₹ 37,500) hence the order may be accepted, however, other qualitative factors may also be taken care-off. Question 42. A company using a continuous manufacturing operation achieves an output of 3 kg per hour. The selling price is ₹ 450 per kg. The raw material cost ₹ 3 25 per kg. of output and the direct labour and variable overheads amount to ₹ 316 per kg. of output. The company has provided an expenditure of ₹ 640 on maintenance and ₹ 6,400 on breakdown repairs per month in its budget. Breakdowns averaging 300 hours per month occur due to mechanical faults. These could be reduced or eliminated, if additional maintenance on the following scale were undertaken:  Breakdown Hours Maintenance Costs (₹) Repair Costs (₹) 0 20,480 0 60 10,240 1,920 120 5,120 2,560 180 2,560 3.840 240 1,280 5,120 300 640 6,400 Using the incremental cost and incremental revenue concept, you are required to: (i) Determine the optimum level upto which breakdown can be reduced to increase production. (ii) Calculate the additional profits obtainable at that level as compared to the present situation. [CA Inter May 2003, 7 Marks] Answer: Contribution per hour : Contribution per kg = Selling price per kg – Variable cost per kg = ₹ 450 – (₹ 125 material cost + ₹ 316 direct labour and overheads) = ₹ 450 – ₹ 441 = ₹ 9 Contribution per hour = 3 kg. × Contribution per kg. = 3 kg. × ₹ 9 = ₹ 27 (i) Optimum level upto which breakdown can be reduced to increase production Optimal level upto which breakdown can be reduced to increase production: Saving of 180 hours and breakdown of 120. (ii) Additional profit at optimum level as compared to present position: ₹ 340 + ₹ 1,620 + ₹ 2,260 = ₹ 4,220 Question 43. OPR Ltd. purchases crude vegetable oil. It does refining of the same. The refining process results in four products at the split-off point – S, P, N and A. Product ‘A’ is fully processed at the split-off point. Product S, P and N can be individually further refined into SK, PM and NL respectively. The join cost of purchasing the crude vegetable oil and processing it were ₹ 40,000 other details are as follows:  Product Further processing cost (₹) Sales at split-off point (₹) Sales after further processing (₹) S 80,000 20,000 1,20.000 P 32,000 12,000 40,000 N 36,000 28,000 48.000 A – 20,000 – You are required to identify the products which can be further processed for maximizing profits and make suitable suggestions. a [CA Inter July 2021, 5 Marks] Answer: Statement showing further processing decisions Since the Incremental Revenue from Product S exceeds the Incremental Cost of further processing, Product S should be processed further and Products P and N should be sold at split off point. Question 44. The profit for the year of R.J. Ltd. works out to 12.5% of the capital employed and the relevant figures are as under:  Sales ₹ 5,00,000 Direct Materials ₹ 2,50,000 Direct Labour ₹ 1,00,000 Variable Overheads ₹40,000 Capital Employed ₹ 4,00,000 The new Sales Manager who has joined the company recently estimates for next year a profit of about 23% on capital employed, provided the volume of sales is increased by 10% and simultaneously there is an increase in Selling Price of 4% and an overall cost reduction in all the elements of cost by 2%. Required: Find out by computing in detail the cost and profit for next year, whether the proposal of Sales Manager can be adopted. [ICAIModule] Answer: Present profit = Capital employed ₹ 12.5% = ₹ 4,00,000 × 12.5% = ₹ 50,000 Variable Costs = Direct Materials + Direct Labour + Variable o/h = ₹ 2,50,000 + ₹ 1,00,000 + ₹ 40,000 = ₹ 3,90,000 Sales = Variable Costs + Fixed Cost + Profit ₹ 5,00,000 = ₹ 3,90,000 + Fixed Cost + ₹ 50,000 Fixed Cost = ₹ 60,000 Statement Showing “Cost and Profit for the Next Year” Profit on Capital Employed = ($$\frac{₹ 92,780}{₹ 4,00,000}$$ × 100) = 23.19% Since the Profit of ₹ 92,780 is more than 23% of capital employed, the proposal of the Sales Manager can be adopted. Question 45. Moon Ltd. produces products ‘X’, ‘Y’ and ‘27 and has decided to analyse its production mix in respect of these three products – ‘X’, ‘Y’ and ‘Z’ You have the following information:  X Y Z Direct Materials ₹ (per unit) 160 120 80 Variable Overheads ₹ (per unit) 8 20 129 Direct labour: From the current budget, further details are as below : There is a constraint on supply of labour in Department-A and its manpower cannot be increased beyond its present level. Required: (i) Identify the best possible product mix of Moon Ltd. (ii) Calculate the total contribution from the best possible product mix. [CA Inter Nov 2020, 5 Marks] Answer: (i) Statement Showing “Calculation of Contribution/ unit” (ii) Statement Showing Total Contribution from best mix Existing Hours = 10,000 × 6 hrs. + 12,000 × 10 hrs. + 20,000 × 5 hrs. = 2,80,000 hrs. Allocation of Hours on the basis of ranking: Question 46. Mohit Limited manufactures three different products and the following information has been collected from the books of account: The company has currently under discussion, a proposal to discontinue the manufacture of Product U and replace it with Product M, when the following results are anticipated: Required: (i) Compute the PV ratio, total contribution, profit and Break-even sales for the existing product mix. (ii) Compute the PV ratio, total contribution, profit and Break even sales for the proposed product mix. [CA Inter RTP, May 2021] Answer: (i) Computation of PV ratio, contribution and break-even sales for existing product mix (ii) Computation of PV ratio, contribution and break-even sale for proposed product mix Question 47. X Ltd. supplies spare parts to an air craft company Y Ltd. The production capacity of X Ltd. facilitates production of any one spare part for a particular period of time. The following are the cost and other information for the production of the two different spare parts A and B:  Part A Part B Per unit Alloy usage 1.6 kgs. 1.6 kgs. Machine Time: Machine P 0.6 hrs 0.25 hrs. Machine Time: Machine Q 0.5 hrs. 0.55 hrs. Target Price (₹) 145 115 Total hours available Machine P 4,000 hours Machine Q 4,500 hours Alloy available is 13,000 kgs. @ ₹ 12.50 per kg. Variable overheads per machine hours Machine P: ₹ 80 Machine Q: ₹ 100 Required: (i) Identify the spare part which will optimize contribution at the offered price. (ii) If Y Ltd. reduces target price by 10% and offers ₹ 60 per hour of unutilized machine hour, calculate the total contribution from the spare part identified above? [ICAI Module] Answer: (i) Computation of maximum number of parts that can be manufactured Computation of Total Contribution at maximum number of parts (ii) Total Contribution from Spare part A when target price reduced by 10% and unutilised machine hour can be utilised (5 ₹ 60 per hour)  Part A Parts to be manufactured numbers 6,666 Machine P hours used 4,000 Machine Q hours used 3,333 Underutilized Machine Hours (4,500 hrs. – 3,333 hrs.) 1,167 Compensation for unutilized machine hours (1,167 hrs. × ₹ 60) 70,020 ## International Trade Notes – CA Inter Economics Notes International Trade Notes – CA Inter Economics Notes is designed strictly as per the latest syllabus and exam pattern. ## International Trade Notes – CA Inter ECO Notes 1. The Mercantilists’ View of International Trade: • Increase exports and collect precious metals in return • More gold and silver a country accumulates, the richer it becomes • Mercantilism advocated maximizing exports in order to bring in more “specie” (precious metals) and minimizing imports through the state imposing very high tariffs on foreign goods • Trade is a ‘zero-sum game’ • Who win does so only at the expense of losers • One country’s gain is equal to another country’s loss 2. The Theory of Absolute Advantage: • Adam Smith was the first to put across the possibility that international trade is not a zero-sum game. • Absolute cost advantage is the determinant of mutually beneficial in-ternational trade. • In other words, exchange of goods between two countries will take place only if each of the two countries can produce one commodity at an absolutely lower production cost than the other country. Output per Hour of Labour  Commodity Country A Country B Wheat (bushels/hour) 6 1 Cloth (yards/hour) 4 5 • Country A is more efficient than country B, or has an absolute advantage over country B in production of wheat. • Similarly, country B is more efficient than country A, or has an absolute advantage over country A in the production of cloth. 3. The Theory of Comparative Advantage: • David Ricardo developed the classical theory of comparative advantage in his book ‘Principles of Political Economy and Taxation’ published in 1817. • Even if one nation is less efficient than the other nation in the production of all commodities, there is still scope for mutually beneficial trade. • The first nation should specialize in the production and export of the commodity in which its absolute disadvantage is smaller and import the commodity in which its absolute disadvantage is greater. Output per Hour of Labour  Commodity Country A Country B Wheat (bushels/hour) 6 1 Cloth (yards/hour) 4 2 • Country A’s absolute advantage is greater in wheat • Country B’s absolute disadvantage is smaller in cloth, so its comparative advantage lies in cloth production. 4. The Heckscher -Ohlin Theory of Trade or Factor-Endowment Theory of Trade or Modem Theory of Trade or Heckscher-Ohlin-Samuelson theorem: • Different regions have different factor endowments (Labour, Capital). • If a country is a capital abundant one, it will produce and export capital intensive goods. • A labour-abundant country will produce and export labour intensive goods 5. New Trade Theory – An Introduction: • New Trade Theory (NTT) is an economic theory that was developed in the 1970’s as a way to understand international trade patterns. • According to NTT, two key concepts give advantages to countries that import goods to compete with products from the home country: • Economies of Scale: If the firm serves domestic as well as foreign market instead of just one, it can reap, the benefit of large scale of production consequently the profits are likely to be higher. • Network effects: The value of the product or service is enhanced as the number of individuals using it increases. This is also referred to as the ‘bandwagon effect’. 6. Forms of Import Tariffs: • Specific Tariff fixed monetary tax per physical unit of the good imported • Advalorem tariff constant percentage of the monetary value of one unit of the imported good • Mixed Tariffs 5 percent ad valorem or ₹ 3,000 per tonne, whichever is higher • Compound Tariff or a Compound Duty is a combination of an ad valorem and a specific tariff • Technical/Other Tariff the duties are payable by its components or related items • Tariff Rate Quotas imports above the quota face a much higher tariff • Most-Favoured Nation Tariffs MFN rates are the highest (most restrictive) that WTO members charge one another • Variable Tariff a duty typically fixed to bring the price up to the domestic support price • Preferential Tariff a lower tariff is charged from goods imported from a country which is given preferential treatment • Bound Tariff which a WTO member binds itself with a legal commitment not to raise it above a certain level • Applied Tariffs duty that is actually charged on imports • Escalated Tariff nominal tariff rates on imports of manufactured goods are higher than tariff rates on intermediate inputs and raw materials • Prohibitive tariff so high that no imports will enter • Import subsidies 7. Tariffs as Response to Trade Distortions: • Anti-dumping Duties: Dumping occurs when manufacturers sell goods in a foreign country below the sales prices in their domestic market or below their full average cost of the product. Anti-dumping duty is additional import duty so as to offset the foreign firm’s unfair price advantage. • Countervailing Duties: Countervailing duties are tariffs that aim to offset the artificially low prices charged by exporters who enjoy export subsidies and tax concessions offered by the governments in their home country. 8. Effects of Tariffs: • Tariff barriers create obstacles to trade, decrease the international trade • Tariffs discourage import • Protect domestic industries • The price increase in the domestic market • An increase in the output of the existing firm • An increase in employment in the industry • Prevent countries from enjoying gains from trade arising from compar-ative advantage. • Tariffs increase government revenues 9. Non – Tariff Measures (NTMs): Non-tariff measures comprise all types of measures which alter the conditions of international trade, including policies and regulations that restrict trade and those that facilitate it: • Technical Measures • Non-technical Measures 10. Technical Measures: • Sanitary and Phytosanitary (SPS) Measures: SPS measures are applied to protect human, animal or plant life from risks arising from additives, pests, contaminants, toxins or disease-causing organisms and to protect biodiversity • Technical Barriers To Trade(TBT): Mandatory ‘Standards and Technical Regulations’ that define the specific characteristics that a product should have, such as its size, shape, design, labelling/marking/packaging, functionality or performance and production methods, excluding measures covered by the SPS Agreement 11. Non – Technical Measures: • Import Quotas • Price Control Measures/Para Tariff Measures • Non-automatic Licensing and Prohibitions • Financial Measures • Measures Affecting Competition • Government Procurement Policies • Trade-Related Investment Measures • Distribution Restrictions • Restriction on Post-sales Services • Administrative Procedures • Rules of origin • Safeguard Measures • Embargos/Total Ban 12. Export – Related Measures: • Ban on exports • Export Taxes • Export Subsidies and Incentives • Voluntary Export Restraints 13. Taxonomy of Regional Trade Agreements (RTAS): • Unilateral trade agreements • Bilateral Agreements • Regional Preferential Trade Agreements • Trading Bloc: group of countries that have a free trade agreement be-tween themselves • Free-trade area: group of countries that eliminate all tariff barriers independence in determining their tariffs with non-members • A customs union: group of countries that eliminate all tariffs on trade among themselves but maintain a common external tariff on trade with countries • Common Market: free flow of factors of production labour and capital • Economic and Monetary Union: common currency and macroeconomic policies 14. The General Agreement on Tariffs and Trade (GATT): • GATT provided the rules for much of world trade for 47 years, from 1948 to 1994, • It was only a multilateral instrument governing international trade or a provisional agreement • The original intention to create an International Trade Organization (ITO) did not succeed • The Kennedy Round in the mid-sixties, and the Tokyo Round in the 1970s led to massive reductions in bilateral tariffs, establishment of negotiation rules and procedures on dispute resolution, dumping and licensing • The eighth, the Uruguay Round of 1986-94, was the last and most consequential of all rounds and culminated in the birth of WTO and a new set of agreements. 15. The GATT lost its relevance by 1980s because: • It was obsolete • International investments had expanded substantially • Intellectual property rights and trade in services were not covered • Liberalizing agricultural trade were not successful • Inadequacies in institutional structure and dispute settlement system 16. The Uruguay Round and the Establishment of WTO: • The need for a formal international organization which is more powerful and comprehensive was felt by late 1980s • Members established 15 groups to work • The Round started in Uruguay in September 1986 • Finally, in December 1993, the Uruguay Round was completed after seven years • The agreement was signed by most countries on April 15, 1994, and took effect on July 1, 1995. • It also marked the birth of the World Trade Organization (WTO) 17. The World Trade Organization (WTO): • The most important outcome of the Uruguay Round agreement was the replacement of the GATT secretariat with the WTO in Geneva with authority not only in trade in industrial products but also in agricultural products and services. • The objectives of the WTO Agreements include “raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, and expanding the production of and trade in goods and services”. • The principal objective of the WTO is to facilitate the flow of international trade smoothly, freely, fairly and predictably 18. The Structure of the WTO: • Secretariat located in Geneva, headed by a Director General • It has a three-tier system of decision making • The WTO’s top level decision-making body is the Ministerial Conference • The next level is the General Council • At the next level, the Goods Council, Services Council and Intellectual Property (TRIPS) Council 19. The Guiding Principles of World Trade Organization (WTO): • Trade without discrimination • The National Treatment Principle (NTP) • Free trade/”progressive liberalization” • Predictability • Principle of general prohibition of quantitative restrictions • Greater competitiveness • Tariffs as legitimate measures for the protection of domestic industries • Transparency in Decision Making • Market Access • Special privileges to less developed countries • Protection of Health & Environment • A transparent, effective and verifiable dispute settlement mechanism 20. The Doha Round: • The Doha Round, which is the ninth round, in November 2001 • Seeks to accomplish major modifications through lower trade barriers and revised trade rules • The negotiations include 20 areas of trade • The most controversial topic in the yet to conclude Doha Agenda has been agriculture trade. 21. The Exchange Rate: Exchange rate is the rate at which the currency of one country exchanges for the currency of another country. • A direct quote is the number of units of a local currency exchangeable for one unit of a foreign currency. Example: ₹ 66 is needed to buy one US dollar • An indirect quote is the number of units of a foreign currency exchange-able for one unit of local currency. Example:$ 0.0151 per rupee

22. The Exchange Rate Regimes:
It refers to the method by which the value of the domestic currency in terms of foreign currencies is determined. There are two types of exchange rate regimes:

• Floating exchange rate regime (also called a flexible exchange rate):
The equilibrium value of the exchange rate of a country’s currency is market determined, and
• Fixed exchange rate regime/pegged exchanged rate:
Central Bank and/or government announces what its currency will be worth in terms of either another country’s currency or a basket of currencies or another measure of value, such as gold.

23. The Main Advantages of a Fixed Rate Regime are:

• Eliminates exchange rate risks
• Lower levels of inflation
• Stability encourages investment
• Enhance the credibility of the country’s monetary policy
• Adequate amount of foreign exchange reserves

24. The Main Advantages of a Floating Rate Regime are:

• Independent monetary policy
• Exchange rate can be used as a policy tool
• The central bank is not required to maintain a huge foreign exchange reserves

25. Nominal Versus Real Exchange Rates:

• Nominal exchange rate: how much of one currency can be traded for a unit of another currency when prices are constant.
• The ‘Real exchange rate’: describes ‘how many’ of a good or service in one country can be traded for ‘one’ of that good or service in a foreign country. It is calculated as:

Real exchange rate = Nominal exchange rate × $$\frac{\text { Domestic Price Index }}{\text { Foreign Price Index }}$$

26. The Foreign Exchange Market:
The wide-reaching collection of markets and institutions that handle the ex-change of foreign currencies is known as the foreign exchange market.

In the foreign exchange market, there are two types of transactions:

• Current transactions which are carried out in the spot market and the exchange involves immediate delivery, and
• Contracts to buy or sell currencies for future delivery which are carried out in forward and/or futures markets.

27. Determination of Nominal Exchange Rate:
The supply of and demand for foreign exchange in the domestic foreign ex-change market determine the country’s exchange rate.

28. Devaluation (Revaluation) Vs Depreciation (Appreciation):

• Devaluation is a deliberate downward adjustment in the value of a country’s currency relative to another currency, group of currencies or standard and depreciation is a decrease in a currency’s value due to market forces.
• Revaluation is the opposite of devaluation and the term refers to a discrete raising of the otherwise fixed par value of a nation’s currency and appreciation is an increase in a currency’s value due to market forces.

29. Impacts of Exchange Rate Fluctuations on Domestic Economy:

• Changes in import spending and export revenue
• Changing the relative prices of domestically-produced and foreign-pro-duced goods and sendees
• Affect economic activity in the domestic economy
• Currency depreciation helps in increases the volume of exports and promotes trade balance.
• Increased import prices will increase firms’ cost of production, push domestic prices up and decrease real output.
• For an economy where exports are significantly high, a depreciated currency would mean a lot of gain.
• Make financial forecasting more difficult for firms
• Depreciating currency hits investor sentiments

30. Types of Foreign Capital:

• Foreign aid or assistance which may be:
• Bilateral or direct inter government grants
• Multilateral aid
• Tied aid
• Foreign grants which are voluntary transfer
• Borrowings which may take different forms such as:
• Direct inter government loans
• Loans from international institutions (e.g. world bank, IMF, ADB)
• Soft loans for e.g. from affiliates of World Bank such as IDA
• External commercial borrowing, and
• Deposits from non-resident Indians (NRI)
• Investments in the form of:
• Foreign portfolio investment (FPI) in bonds, stocks and securities, and
• Foreign direct investment (FDI) in industrial, commercial and similar other enterprises

31. Foreign Direct Investment (FDI):
Foreign direct investment is defined as a process whereby the resident of one country (ie. home country) acquires ownership of an asset in another country (le. the host country) and such movement of capital involves ownership, control as well as management of the asset in the host country.

FDI may be categorized as horizontal, vertical or conglomerate:

• A horizontal direct investment: same type of business
• A vertical investment: different from main business activity yet in some way supplements its major activity
• A conglomerate: unrelated to its existing business in its home country

32. Modes of Foreign Direct Investment (FDI):

• Opening of a subsidiary in a foreign country,
• Equity injection into an overseas company,
• Acquiring a controlling interest in an existing foreign company,
• Mergers and acquisitions (M&A),
• Joint venture with a foreign company,
• Green field investment

33. Foreign Portfolio Investment (FPI):
Foreign portfolio investment is the flow of what economists call ‘financial capital’ rather than ‘real capital’ and does not involve ownership or control on the part of the investor.

34. Foreign Direct Investment (FDI) Fs. Foreign Portfolio Investment (FPI):

 Foreign direct investment (FDI) Foreign portfolio investment (FPI) Investment involves creation of physical assets Investment is only in financial assets Has a long term interest and therefore remain invested for long Only short term interest and generally remain invested for short periods Relatively difficult to withdraw Relatively easy to withdraw Not inclined to be speculative Speculative in nature Often accompanied by technology transfer Not accompanied by technology transfer Direct impact on employment of labour and wages No direct impact on employment of labour and wages Enduring interest in management and control No abiding interest in management and control Securities are held with significant degree of influence by the investor on the management of the enterprise Securities are held purely as a financial investment and no significant degree of influence on the management of the enterprise

35. Reasons for Foreign Direct Investment:

• The chief motive for shifting of capital between different regions or between different industries is the expectation of higher rate of return than what is possible in the home country
• Investment in a host country may be found profitable by foreign firms because of some firm-specific knowledge or’ assets

36. Benefits of Foreign Direct Investment:

• Competitive environment in the host country
• Enhance the total output
• FDI can accelerate growth and foster economic development
• Political reforms, including legal systems and macroeconomic policies
• It generates direct and indirect employment in the recipient country
• Promote relatively higher wages for skilled jobs
• Source of new tax revenue
• Better work culture and higher productivity standards

37. Foreign Direct Investment In India (FDI):

• The most important shift in investment policy occurred when India em-barked upon economic liberalisation and reforms programme in 1991 to raise its growth potential and to integrate it with the world economy.
• According to United Nations Conference on Trade and Development (UNCTAD)’s World Investment Report 2016, India ranks as the tenth highest recipient of foreign direct investment globally in 2015 receiving $44 billion of investment that year compared to$35 billion in 2014. In-dia has also moved up by one rank to become the sixth most preferred investment destination.
• India received the maximum FDI equity inflows from Mauritius (US$5.85 billion) followed by Singapore, Netherlands, Japan and the USA. 38. In India, Foreign Investment is Prohibited in the Following Sectors: • Lottery business including Government/private lottery, online lotteries, etc. • Gambling and betting including casinos etc. • Chit funds • Nidhi company • Trading in Transferable Development Rights (TDRs) • Real Estate Business or Construction of Farm Houses • Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes. • Atomic energy and railway operations 39. Overseas Direct Investment by Indian Companies: • Outward Foreign Direct Investment (OFDI) from India stood at US$ 1.86 billion in the month of June, 2016.
• The overseas investments have been primarily driven by resource seek-ing, market seeking or technology seeking motives.
• Many Indian IT firms like Tata Consultancy Services, Infosys, WIPRO, and Satyam acquired global contracts and established overseas offices in developed economies to be close to their key clients.
• Overseas investments by Indian companies, especially to acquire energy resources in Australia, Indonesia and Africa.
• Indian entrepreneurs are also choosing investment destinations in countries such as Mauritius, Singapore, British Virgin Islands, and the Netherlands on account of higher tax benefits they provide.

## Money Market – CA Inter Economics Study Material

Money Market – CA Inter Economics Study Material is designed strictly as per the latest syllabus and exam pattern.

## Money Market – CA Inter Economics Study Material

Theory Questions

Question 1.
What would be the impact of each of the following on credit multiplier and money supply? (3 Marks May 2018)
(a) If Commercial Banks keep 100 percent reserves.
(b) If Commercial Banks do not keep reserves.
(c) If Commercial Banks keep excess reserves.
Credit Multiplier = 1 ÷ required reserve ratio
(a) If commercial banks keep 100% reserves, the reserve deposit ratio is one and the value of money multiplier is one. Deposits simply substitute for the currency that is held by banks as reserves and therefore, no new money is created by banks.

(b) If commercial banks do not keep reserves and lends the entire deposits, it is a case of zero required reserve ratio and credit multiplier will be infinite and therefore money creation will also be infinite.

(c) Excess reserves are reserves over and above what banks are legally required to hold against deposits. The additional units of money that goes into ‘excess reserves’ of the commercial banks do not lead to any additional loans, and therefore, these excess reserves do not lead to creation of money. The increase in banks’ excess reserves reduces the credit multiplier, causing the money supply to decline.

Question 2.
Explain the following modified equation of exchange as given by Irving Fisher: MV+M’ V’ = PT. (3 Marks May 2018)
Modified Equation of exchange as given by Irving Fisher: MV + M’V’ = PT

This is an extended form of the original equation of exchange which Fisher gave to include demand deposits (M’) and their velocity (V’) in the total supply of money. The equation can also be rewritten as P = (MV + M’ V’) / T.

From the above equation, it is evident that the price level is determined by the following factors:
(a) Quantity of money in circulation (M),
(b) The velocity of circulation of money (V), .
(c) The volume of credit money (M’), the velocity of circulation of credit money (V’) and the volume of trade (T).

The equation of exchange further shows that the price level (P) is directly related to M, V, M’ and V’. It is, however, inversely related to T. Velocity of money in circulation (V) and the velocity of credit money (V’) remain constant. Since full employment prevails and since T is function of national income the volume of transactions T is fixed in the short run.

The total volume of transactions (T) multiplied by the price level (P) represents the demand for money. The demand for money (PT) is equal to the supply of money (MV + M’V’). In any given period, the total value of transactions made is equal to PT and the value of money flow is equal to MV+ M’V’.

Question 3.
Explain why people hold money according to Liquidity Preference Theory. (3 Marks May 2018)
People hold money according to Liquidity Preference Theory for following three motives:
1. The transactions motive: People hold cash for current transactions for personal and business exchanges i.e. to bridge the time gap between receipt of income and planned expenditures.

2. The precautionary motive: People hold cash to make unanticipated expenditures that may occur due to unforeseen and unpredictable contingencies.

3. The speculative motive:This motive reflects people’s desire to hold cash in order to be equipped to exploit any attractive investment opportunity requiring cash expenditure. According to Keynes, people demand to hold money balances to take advantage of the future changes in the rate of interest, which is the same as future changes in bond prices.

Question 4.
Explain the difference between Liquidity Adjustment Facility (LAP) and Marginal Standing Facility (MSF). (3 Marks May 2018}
Liquidity Adjustment Facility (LAF): Liquidity Adjustment Facility (LAF) which was introduced by RBI in June, 2000, is a facility extended to the scheduled commercial banks and primary dealers to avail of liquidity in case of requirement on an overnight basis against the collateral of government securities including state government securities. Its objective is to assist banks to adjust their day to day mismatches in liquidity. Currently, the RBI provides financial accommodation to the commercial banks through repos/reverse repos under LAF.

Marginal Standing Facility (MSF): Marginal Standing Facility (MSF) which was introduced by RBI in its monetary policy statements 2011-12, refers to the facility under which scheduled commercial banks can borrow additional amount of overnight money from the central bank over and above what is available to them through the LAF window by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a limit at a penal rate of interest.

This provides a safety valve against unexpected liquidity shocks to the banking system. The MSF would be the last resort for banks once they exhaust all borrowing options including the liquidity adjustment facility.

Question 5.
How do changes in Cash Reserve Ratio (CRR) impact the economy? (2 Marks May 2018)
Impact of changes in Cash Reserve Ratio (CRR): Change in Cash Reserve Ratio is one of the important quantitative tools aiding in liquidity management. Higher the CRR with the central bank, lower will be the liquidity in the system and vice versa. In order to control credit expansion during periods of inflation, the central bank increases the CRR. With higher CRR, banks have to keep more reserves and the banks’ lendable resources get depleted leading to decrease in the volume of bank lending and contraction in credit and money supply in the economy.

During deflation, the central bank reduces the CRR in order to enable the banks to expand credit and increase the supply of money available in the economy. With more credit available in the market, economic activities get accelerated bringing the economy back to stability and economic growth.

Question 6.
Explain the role of Monetary Policy Committee (MPC) in India. (3 Marks Nov 2018)
Role of Monetary Policy Committee (MPC) in India: Monetary Policy Committee (MPC) constituted by the Central Government is an empowered six-member committee with RBI Governor as the chairperson. Under the Monetary Policy Framework Agreement, the RBI will be responsible for price stability and for containing inflation targets at 4% (with a standard deviation of 2%) in the medium term.

The committee is answerable to the Government of India if the inflation exceeds the range prescribed for three consecutive months. MPC has complete control over monetary policy decisions to ensure economic growth and price stability. The MPC decides the changes to be made to the policy rate (repo rate) so as to contain inflation within the target level specified to it by the Central Government.

Fixing of the benchmark policy interest rate (repo rate) is made in a more consultative and participative manner and on the basis of majority vote by this panel of experts. This has added lot of value and transparency to monetary policy decisions.

Question 7.
Mention the general characteristics of Money. (2 Marks Nov 2018)
Characteristics of money are:

1. Generally acceptable,
2. Durable or long-lasting,
3. Effortlessly recognizable, ‘
4. Difficult to counterfeit i.e. not easily reproducible by people,
5. Relatively scarce, but has elasticity of supply,
6. Portable or easily transported,
7. Possessing uniformity; and
8. Divisible into smaller parts in usable quantities or fractions without losing value.

Question 8.
Explain the different mechanism of monetary policy which influences the price level and national income. (3 Marks Nov 2018)
Different mechanisms of monetary policy or monetary transmission mechanism are:
(1) The interest rate channel A contractionary monetary policy-induced increase in interest rates increases the cost of capital and the real cost of borrowing for firms and households with the result that they cut back on their investment expenditures and durable goods consumption expenditures respectively.

A decline in aggregate demand results in a fall in aggregate output and employment. Conversely, an expansionary monetary policy induced decrease in interest rates will have the opposite effect through decreases in cost of capital for firms and cost of borrowing for households.

(2) The exchange rate channel The exchange rate channel works through expenditure switching between domestic and foreign goods. Appreciation of the domestic currency makes domestically produced goods more expensive compared to foreign-produced goods. This causes net exports to fall; correspondingly domestic output and employment also fall.

(3) The quantum channel (e.g., relating to money supply and credit) Two distinct credit channels: the bank lending channel and the balance sheet channel- also allow the effects of monetary policy actions to propagate through the real economy. Credit channel operates by altering access of firms and households to bank credit.

A direct effect of monetary policy on the firm’s balance sheet comes about when an increase in interest rates works to increase the payments that the firm must make to service its floating rate debts. An indirect effect sets in, when the same increase in interest rates works to reduce the capitalized value of the firm’s long-lived assets.

(4) The asset price channel: Asset prices respond to monetary policy changes and consequently impact output, employment and inflation. A policy-induced increase in the short-term nominal interest rates makes debt instruments more attractive than equities in the eyes of investors leading to a fall in equity prices, erosion in household financial wealth, fall in consumption, output, and employment.

Question 9.
Explain the Monetary Policy Framework Agreement. (2 Marks Nov 2018)
The Reserve Bank of India (RBI) Act, 1934 was amended in 2016, for giving a statutory backing to the Monetary Policy Framework Agreement. It is an agreement reached between the Government of India and the RBI on the maximum tolerable inflation rate that the RBI should target to achieve price stability.

The amended RBI Act (2016) provides for a statutory basis for the implementation of the ‘flexible inflation targeting framework’ by abandoning the ‘multiple indicator’ approach. The inflation target is to be set by the Government of India, in consultation with the Reserve Bank, once in every five years. Accordingly:

1. The Central Government has notified 4 per cent Consumer Price Index (CPI) inflation as the target for the period from August 5,2016 to March 31, 2021 with the upper tolerance limit of 6 per cent and the lower tolerance limit of 2 per cent.
2. The RBI is mandated to publish a Monetary Policy Report every six months, explaining the sources of inflation and the forecasts of inflation for the coming period of six to eighteen months.

Question 10.
Why is the central bank referred to as a “banker’s bank”? (2 Marks May 2019)
A central bank referred to as a ‘banker’s bank’ because:
(1) The central bank acts as a custodian of cash reserves of commercial banks in the country.

(2) The central bank provides efficient means of funds transfer for all banks. All commercial banks maintain accounts with the central bank and it enables smooth and swift clearing and settlements of inter-bank transactions and interbank payments.

(3) The central bank acts as a lender of last resort. It provides liquidity to banks when the latter face shortage of liquidity. The scheduled commercial banks can borrow from the discount window against the collateral of securities like commercial bills, government securities, treasury bills, or other eligible papers.

Question 11.
“Money has four functions: a medium, a measure, a standard and a store.” Elucidate. (2 Marks May 2019, 3 Marks Nov 2020)
Four functions of money are:
1. Money is a convenient medium of exchange: Money is a convenient me
dium of exchange or it is an instrument that facilitates easy exchange of goods and services. Money, though not having any inherent power to directly satisfy human wants, by acting as a medium of exchange, it commands purchasing power and its possession enables us to purchase goods and services to satisfy our wants. By acting as an intermediary, money increases the ease of trade and reduces the inefficiency and transaction costs involved in a barter exchange.

By decomposing the single barter transaction into two separate transactions of sale and purchase, money eliminates the need for double coincidence of wants. Money also facilitates separation of transactions both in time and place and this in turn enables us to economize on time and efforts involved in transactions.

2. Money is a ‘common measure of value: The monetary unit is the unit of measurement in terms of which the value of all goods and services is measured and expressed. It is convenient to trade all commodities in exchange for a single commodity.

So also, it is convenient to measure the prices of all commodities in terms of a single unit, rather than record the relative price of every good in terms of every other good. A common unit of account facilitates a system of orderly pricing which is crucial for rational economic choices. Goods and services which are otherwise not comparable are made comparable through expressing the worth of each in terms of money.

3. Money serves as a unit or standard of deferred payment: Money facilitates recording of deferred promises to pay. Money is the unit in terms of which future payments are contracted or stated. However, variations in the purchasing power of money due to inflation or deflation, reduces the efficacy of money in this function.

4. Money is a store of value: People prefer to hold it as an asset, that is, as part of their stock of wealth. The splitting of purchases and sale into two transactions involves a separation in both time and space. This separation is possible because money can be used as a store of value or store of means of payment during the intervening time. Again, rather than spending one’s money at present, one can store it for use at some future time.

Thus, money functions as a temporary abode of purchasing power in order to efficiently perform its medium of exchange function. Money also functions as a permanent store of value. Money is the only asset which has perfect liquidity.

Question 12.
Describe the determinants of demand for money as identified by Milton Friedman in his restatement of Quantity Theory of demand for money. (3 Marks May 2019)
Determinants of demand of money as per Milton Friedman’s restatement of Quantity theory of demand of money are:

1. Permanent income and
2. Relative returns on assets (which incorporate risk).

Friedman maintains that it is permanent income and not current income as in the Keynesian theory that determines the demand for money. Permanent income which is Friedman’s measure of wealth is the present expected value of all future income. To Friedman, money is a good as any other durable consumption good and its demand is a function of a great number of factors. Friedman identified the following four determinants of the demand for money. The nominal demand for money:

(a) is a function of total wealth, which is represented by permanent income divided by the discount rate, defined as the average return on the five asset classes in the monetarist theory world, namely money, bonds, equity, physical capital and human capital.
(b) is positively related to the price level P. If the price level rises the demand for money increases and vice versa.
(c) rises, if the opportunity costs of money holdings (i.e. returns on bonds and stock) decline and vice versa.
(d) is influenced by inflation, a positive inflation rate reduces the real value of money balances, thereby increasing the opportunity costs of money holdings.

Question 13.
Explain the open market operations conducted by RBI. (2 Marks Nov 2019)
Open market operations conducted by RBI: Open Market Operations (0M0) is a general term used for monetary policy involving market operations conducted by the Reserve Bank of India by way of sale or purchase of government securities to/from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis.

When the Reserve Bank of India feels that there is excess rupee liquidity in the market, it resorts to sale of government securities for absorption of the excess liquidity. Similarly, when the liquidity conditions are tight, the RBI will buy securities from the market, thereby injecting liquidity into the market.

Question 14.
Explain ‘Reverse Repo Rate’. (2 Marks Nov 2019)
Reverse Repo Rate: ‘Reverse repo operation’ is a monetary policy instrument and in effect it absorbs the liquidity from the system. This operation takes place when the RBI borrows money from commercial banks by selling them securities (which RBI permits) with an agreement to repurchase the securities on a mutually agreed future date at an agreed price which includes interest for the funds borrowed. The interest rate paid by the RBI for such borrowings is called the “Reverse Repo Rate”. Thus, reverse repo rate is the rate of interest paid by the RBI on its borrowings from commercial banks.

Question 15.
Explain the neo-classical approach to demand for money. (3 Marks Nov 2019)
Neo-Classical Approach: The Neo-classical Approach or the cash balance approach put forth by Cambridge economists holds that money increases utility in the following two ways:

1. for transaction motive, ie. for enabling the possibility of split-up of sale and purchase to two different points of time rather than being simultaneous,
2. as a temporary store of wealth ie. for a hedge against uncertainty.

Since demand for money also involves a precautionary motive in this approach and money gives utility in its store of wealth and precautionary modes, money is demanded for itself. How much money will be demanded depends:
(a) partly on income which points to transactions demand, such that higher the income, the greater the quantity of purchases and as a consequence greater will be the need for money as a temporary abode of value to overcome transactions costs, and

(b) partly on other factors of which important ones are wealth and interest rates.
The Cambridge equation is stated as:
Md = k PY
Where,
Md = is the demand for money
Y = real national income
P = average price level of currently produced goods and services
PY = nominal income
K = proportion of nominal income (PY) that people want to hold as cash balances
The term ‘k’ in the above equation is called ‘Cambridge k’. The equation above explains that the demand for money (M) equals k proportion of the total money income. The neo-classical theory changed the focus of the quantity theory of money to money demand and hypothesized that demand for money is a function of money income.

Question 16.
What is the impact of the following on credit multiplier and money supply, if Commercial Banks keep: (2 Marks Nov 2020)
(1) Less Reserve?
(2) Excess Reserve?
Credit Multiplier = 1 ÷ Required Reserve Ratio
(1) The impact on credit multiplier and money supply, if commercial banks keep less reserves: The Credit Multiplier describes the amount of additional money created by commercial banks through the process of lending the available money it has in excess of the central bank’s reserve requirements.

Thus the credit multiplier is inextricably tied to the bank’s reserve requirement. If reserve ratio is 40%, then credit multiplier = 1 ÷ 0.40 = 2.5. If banks need to keep only less reserve, then the credit multiplier would be high and therefore money supply would be higher. If the reserve ratio is only 20%, then the credit multiplier is 1 ÷ 0.20 = 5.

(2) The impact on credit multiplier and money supply, if commercial banks keep excess reserve: ‘Excess reserves’ refers to the positive difference between total reserves (TR) and required reserves (RR). The money that is kept as ‘excess reserves’ of the commercial banks do not lead to any additional loans, and therefore, these excess reserves do not lead to creation of credit. When banks keep excess reserves, the credit multiplier would be low and it impact on money supply would be less.

Question 17.
“The deposit multiplier and the money multiplier though closely related are not identical”. Explain briefly. (2 Marks Nov 2020)
The Deposit Multiplier and the Money Multiplier: The money multiplier denotes by ‘how much the money supply will change for a given change in high-powered money’. The deposit multiplier describes the amount of additional money created by commercial bank through the process of lending the available money it has in excess of the central bank’s reserve requirements. Though closely related they are not identical because:

(1) Generally banks do not lend out all of their available money, but instead maintain reserves at a level above the minimum required reserve. In other words, banks keep excess reserves.

(2) The public prefers to hold some cash and therefore, some of the increase in loans will not be deposited at the commercial banks, but will be kept cash. This means, that when new reserves enter the banking system they will not be multiplied entirely by the deposit multiplier into new demand deposits. Some money will leave the banking system in the form of cash. Therefore, the money supply will be raised by less than the demand deposits.

If some portion of the increase in high-powered money finds its way into currency, this portion does not undergo multiple deposit expansion. The size of the money multiplier is reduced when funds are held as cash rather than as demand deposits.

Question 18.
What is the meant by ‘Statutory Liquidity Ratio’? -In which forms this ratio is maintained? (3 Marks Nov 2020)
The Statutory Liquidity Ratio: The Statutory Liquidity Ratio (SLR) is the ratio of a bank’s liquid assets to its net demand and time liabilities (NDTL).

As per the Banking Regulations Act, 1949, all scheduled commercial banks in India are required to maintain a stipulated percentage of their total Demand and Time Liabilities (DTL) / Net DTL (NDTL) in one of the following forms:

1. Cash,
2. Gold, or
3. Investments in un-encumbered Instruments that include:
(a) Treasury-bills of the Government of India.
(b) Dated securities including those issued by the Government of India from time to time under the market borrowings programme and the Market Stabilization Scheme (MSS).
(c) State Development Loans (SDLs) issued by State Governments under their market borrowings programme.
(d) Other instruments as notified by the RBI. These include mainly the securities issued by PSEs.
The SLR requires holding of assets in one of the above three categories by the bank itself.

Question 19.
Explain the Transactions Motive for holding cash. (2 Marks Jan 2021)
Transactions Motive for holding cash:The transactions motive for holding cash relates to ‘the need for cash for current transactions for personal and business exchange.’ The need for holding money arises between as there is lack of synchronization between receipts and expenditures.

The transaction motive is further classified into income motive and business motive, both of which stressed on the requirement of individuals and businesses respectively to bridge the time gap between receipt of income and planned expenditure. The transaction demand for money is a direct proportional and positive function of the level of Income.
Lr = KY
Where,
Lr = is the transaction demand for money
K = is the ratio of earnings which is kept for transaction purposes
Y = is the earning

Question 20.
Distinguish between Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). (3 Marks Jan 2021)
Cash Reserve ratio (CRR): Cash Reserve Ratio (CRR) refers to the average daily balance that a bank is required to maintain with the Reserve bank of India as a share of its total net demand and time liabilities (NDTL). This Percentage will be notified from time to time by Reserve bank of India. The RBI may set the ratio in keeping with the broad objective of maintaining monetary stability in the economy.

This requirement applies uniformly to all the scheduled banks in the country irrespective of its size or financial position. Higher the CRR with the RBI, lower will be the liquidity in the system and vice versa. During Slowdown in the economy, the RBI reduces the CRR in order to enable the banks to expand credit and increase the supply of money available in the economy. In order to contain credit expansion during the period of high inflation, the RBI increases the CRR.

The Statutory Liquidity Ratio: The Statutory Liquidity Ratio (SLR) is the ratio of a bank’s liquid assets to its net demand and time liabilities (NDTL).

As per the Banking Regulations Act, 1949, all scheduled commercial banks in India are required to maintain a stipulated percentage of their total Demand and Time Liabilities (DTL)/Net DTL (NDTL) in one of the following forms:

1. Cash,
2. Gold, or
3. Investments in un-encumbered Instruments that include:
(a) Treasury-bills of the Government of India.
(b) Dated securities including those issued by the Government of India from time to time under the market borrowings programme and the Market Stabilization Scheme (MSS).
(c) State Development Loans (SDLs) issued by State Governments under their market borrowings programme.
(d) Other instruments as notified by the RBI. These include mainly the securities issued by PSEs.

While CRR has to be maintained by banks as cash with the RBI, the SLR requires holding of assets in one of the above three categories by the bank itself. The Banks which fail to meet its SLR obligations are liable to be imposed penalty in the form of penal interest payable to RBI. The SLR is also a powerful tool for controlling liquidity in the domestic market by means of manipulating bank credit.

Question 21.
Discuss the role of ‘Market Stabilization Scheme* In our economy. (2 Marks Jan 2021)
Market Stabilization Scfieme/Market Stabilization Scheme was introduced in 2004 as an Instrument for monetary management with the primary aim of aiding the sterilization operations of the RBI. (Sterilization is the process by which the monetary authority sterilizes the effects of significant foreign capital inflows on domestic liquidity by off- loading parts of the stock of government securities held by it).

Surplus liquidity of a more enduring nature arising from large capital inflows is absorbed through sale of short, dated government securities and treasury bills. Under this Scheme, the government of India borrows from the RBI (Such borrowing being additional to its normal borrowing requirements and issues treasury-bills/dated securities for absorbing excess liquidity from the market arising from large capital inflows.

Question 22.
Explain the concept of ‘Money Multiplier’. (2 Marks Jan 2021)
Money Multiplier (m) = Money Supply ÷ Monetary Base
Money Multiplier: Money multiplier (m) is defined as a ratio that relates the changes in the money supply to a given change in the monetary base. It is the ratio of the stock of money to the stock of high-powered money. It denotes by how much the money supply will change for a given change in high powered money. It denotes by how much the money supply will change for a given change in high powered money.

The money multiplier process explains how an increase in the monetary base causes, the money supply to increase by a multiplied amount. For example, if there is an injection of ₹ 500 Crores through an open market operation by the Central Bank of the country and if it leads to an increment of ₹ 5,000 Crores of final money supply, then the money multiplier is said to be 10. Hence the multiplier indicates the change in monetary base which is transformed into money supply.

Question 23.
What do you mean by ‘Reserve Money’? (2 Marks Jan 2021)
The Reserve Money, also known as central bank money, base money or high powered money determines the level of liquidity and the price level in the economy.
Reserve Money = Currency in Circulation + Banker’s deposits with the RBI + other deposits with the RBI.
= Net RBI credit to the government + RBI credit to the commercial sector + RBI’s claim on banks + RBI’s net foreign exchange assets + Government Currency liabilities to the Public- RBI’s net non-monetary liabilities

Practical Problems

Question 1.
The RBI published the following data as on 31st March, 2018. You are required to compute M4: (3 Marks Nov 2018)
(₹ in crores)
Currency with the public – 1,12,206.6
Demand Deposits with Banks – 1,93,300.4
Net Time Deposits with Banks – 2,67,310.2
Other Deposits of RBI – 614.8
Post Office Savings Deposits – 277.5
Post Office National Savings Certificates (NSCs) – 110.5
M4 = Currency and coins with the people + demand deposits with the banks (Current and Saving accounts) + other deposits with the RBI + Net time deposits with the banking system + Total deposits with the Post Office Savings (excluding National Savings Certificates)
= 1,12,206.6 +1,93,300.4 + 2,67,310.2 + 614.8 + 277.5 = 5,73,709.5 Crores

Question 2.
Compute Ml supply of money from the data given below: (3 Marks May 2019)
Currency with public – ₹ 2,13,2798 Crores
Time deposits with bank – ₹ 3,45,000.7 Crores
Demand deposits with bank – ₹ 162,74.5 Crores
Post office savings deposit – ₹ 382.9 Crores
Other deposits of – ₹ 765.1 Crores
M1 = Currency and coins with the people + demand deposits of banks (current and saving accounts) + other deposits of the RBI.
= ₹ 2,13,279.8 + ₹ 1,62,374.5 + ₹ 765.1
= ₹ 3,76,419.4 Crores

Question 3.
What will be the total credit created by the commercial banking system for an initial deposit of ₹ 3,000 at a Required Reserve Ratio (RRR) of 0.05 and 0.08 respectively? Also compute credit multiplier. (2 Marks May 2019)
Credit Multiplier = 1 ÷Required Reserve Ratio
For RRR 0.05 : Credit Multiplier = 1/0.05 = 20
For RRR0.08 : Credit Multiplier = 1/0.08 = 12.5
Credit Creation = Initial Deposit × Credit Multiplier
For RRR 0.05 : Credit creation = ₹ 3,000 × 20 = ₹ 60,000
For RRR 0.08 : Credit creation = ₹ 3,000 × 12.5 = ₹ 37,500

Question 4.
Compute reserve money from the following data published by RBI: (3 Marks Nov 2019)

 ₹ in crores Net RBI credit to the government 8,51,651 RBI Credit to the commercial sector 2,62,115 RBI’s claim on Banks 4,10,315 Government’s Currency liabilities to the public 1,85,060 RBI’s net foreign assets 72,133 RBI’s net non-monetary liabilities 68,032

Reserve Money = Net RBI credit to the Government + RBI credit to the Commercial sector + RBI’s Claims on banks + RBI’s net Foreign assets + Government’s Currency liabilities to the public – RBI’s net non – monetary Liabilities.
= 8,51,651 + 2,62,115 + 4,10,315 + 72,133 + 1,85,060 – 68,032
= 17,13,242 Crores

Question 5.
Compute credit multiplier if the required reserved ratio is 10% and 12.5% for every ₹ 1,00,000 deposited in the hanking system. What will be the total credit money created by the banking system in each case? (2 Marks Nov 2019)
(a) Credit Multiplier = $$\frac{1}{\text { Required Reserved Ratio }}$$
For RRR 10% : Credit Multiplier = 1 / 10% = 10
For RRR 12.5% : Credit Multiplier = 1/12.5% = 8

(b) Credit creation = Initial deposits × Credit Multiplier
For RRR 10% : Credit creation = 1,00,000 × 10 = 10, 00,000
For RRR 12.5% : Credit creation = 1,00,000 × 8 = 8, 00,000

Question 6.
Compute M3 from the following data: (3 Marks Nov 2020)

 Component ₹ in Crores Currency with the public 2,23,432.6 Demand Deposits with Banks 3,40,242.4 Time Deposits with Banks 2,80,736.8 Post office savings Deposits                                                 ‘ 446.7 (Excluding National Saving Certificates) Other Deposits with RBI 392.7 (Including Government Deposits) Post Office National Saving Certificates 83.7 Government Deposits with RBI- 102.5

M3 = Currency with the public + Demand deposits with the banks 4- Time deposits with the banks + ‘Other’ deposits with the RBI
= 2,25,432.6 + 3,40,242.4 + 2,80,736.8 + (392.7 – 102.5)
= ₹ 8,46,702 Crores

Question 7.
Compute M2 supply of money from the following RBI data: (3 Marks Jan 2021)

 Component ₹ in Crores Currency with the public 4,35,656.6 ‘Other’ deposits with RBI 12,34.2 Saving deposits with post office saving banks 647.7 Net time deposits with the banking system                                                ‘ 5,14,834.3 Demand deposits with banks 2,74,254.9

M1 = Currency Notes and Coins with the people + demand deposits with the banking system (currency and saving deposit accounts) + Other deposits with the RBI
= 4,35,656.6 + 2,74,254.9 + 1,234.2 = 7,11,145.7 Crores
M2 = M1 + Saving deposit with Post Office Saving Bank
= 7,11,145.7 + 647.7 = 7,11,793.4 Crores

Important Questions

Question 1.
(a) Calculate M if Velocity 19, Price 108.5 and Volume of transactions 120 billion.
(b) What will be the effect on money supply if velocity is 25?
(a) MV = PT,
M × 19 = 108.5 × 120
M = 685.26 billion

(b) MV = PT,
M × 25 = 108.5 × 120
M = 520.8 billion
Effect: Money supply will decrease by 164.46 (685.26 – 520.8) billion.

Question 2.
(a) Calculate velocity of money, Money Supply 5,000 billion, Price 110 and Volume of transaction 200.
(b) What will be the outcome if volume of transaction increases to 225?
(a) MV = PT,
5,000 × V = 110 × 200
V = 4.4

(b) MV = PT,
5,000 × V = 110 × 225
V = 4.95

Question 3.
Calculate Narrow Money (Ml) from the following data:
Currency with public : ₹ 90,000 Crores
Demand Deposits with Banking System : ₹ 2,00,000 Crores
Time Deposits with Banking System : ₹ 2,20,000 Crores
Other Deposits with RBI : ₹ 2,80,000 Crores
Saving Deposits of Post office saving banks : ₹ 60,000 Crores
M1 = Currency with public + Demand Deposits with Banking System + Other Deposits with the RBI
= 90,000 + 2,00,000 + 2,80,000
= 5,70,000 Crores

Question 4.
Compute credit multiplier if the required reserved ratio is 10% and 12.5% for every ₹ 1,00,000 deposited in the banking system. What will be the total credit money created by the banking system in each case?
(a) Credit Multiplier = $$\frac{1}{\text { Required Reserved Ratio }}$$
For RRR 10% = $$\frac{1}{\text { Required Reserved Ratio }}$$ = 1/10% = 10
For RRR 12.5% = $$\frac{1}{\text { Required Reserved Ratio }}$$ = 1/12.5% = 8

(b) Credit creation = Initial deposits × Credit Multiplier
For RRR 10% = 1,00,000 × 10 = 10,00,000
For RRR 12.5% = 1,00,000 × 8 = 8,00,000

Question 5.
Calculate currency with the Public from the following data (₹ Crores)
Notes in Circulation – 24,96,611
Circulation of Rupee Coin – 25,572
Circulation of Small Coins – 743
Cash on Hand with Banks – 98,305
Currency with the Public = 24,96,611 + 25,572 + 743 – 98,305 = 24,24,621

Question 6.
Calculate M2 from the following data: (₹ Crores)
Notes in Circulation – 24,20,964
Circulation of Rupee Coin – 25,572
Circulation of Small Coins – 743
Post Office Saving Bank Deposits – 1,41,786
Cash on Hand with Banks – 97,563
Deposit Money of the Public – 17,76,199
Demand Deposits with Banks – 17,37,692
‘Other’ Deposits with Reserve Bank – 38,507
Total Post Office Deposits – 14,896
Time Deposits with Banks – 1,78,694
M2 = M1 + Post Office Saving Bank Deposits
Ml = (Notes in Circulation + Circulation of Rupee Coin + Circulation of Small Coins – Cash on Hand with Banks) + Deposit Money of the Public
= (24,20,964 + 25,572 + 743 – 97,563) + 17,76,199
= 41,25,915 Crores
M2 = M1+ Post Office Saving Bank Deposits
= 41,25,915 + 1,41,786
= 42,67,701 Crores

Question 7.
If the required reserve ratio is 10 percent, currency in circulation is ₹ 400 billion, demand deposits are ₹ 1,000 billion, and excess reserves total ₹ 1 billion, find the value of money multiplier.
r = 10% or 0.10
Currency = 400 billion
Deposits = 1,000 billion
Excess Reserves = 1 billion
Money Supply is M = Currency + Deposits = 1,400 billion
c = C/D
= 400 billion/1,000 billion
= 0.4 or depositors hold 40% of their money as currency
e = 1 billion /1,000 billion
= 0.001 or banks hold 0.1 % of their deposits as excess reserves
Multiplier ‘m’ = $$\frac{1+c}{r+e+c}$$ = $$\frac{1+0.4}{0.1+0.001+0.4}$$ = 2.79
Therefore, a 1 unit increase in MB leads to a 2.79 units increase in M.

## CA Inter Costing Question Paper Nov 2022

CA Inter Costing Question Paper Nov 2022 – CA Inter Costing Study Material is designed strictly as per the latest syllabus and exam pattern.

## CA Inter Nov 2022 Costing Question Paper Solution

Question 1.
(a) A Ltd. is a pharmaceutical company which produces vaccines for diseases like Monkey Pox, Covid-19 and Chickenpox. A distributor has given an order for 1,600 Monkey Pox Vaccines. The company can produce 80 vaccines at a time. To process a batch of 80 Monkey Pox Vaccines, the following costs would be incurred:

 ₹ Direct Materials 4,250 Direct wages 500 Lab set up cost 1,400

The Production Overheads are absorbed at a rate of 20% of direct wages and 20% of total production cost is charged in each batch for selling, distribution and administration Overheads. The company is willing to earn profit of 25% on sales value.
You are required to determine:
(i) Total Sales value for 1,600 Monkey Pox Vaccines
(ii) Selling price per unit of the Vaccine.
(b) ABC Bank is having a branch which is engaged in processing of ‘Vehicle Loan’ and ‘Education Loan’ applications in addition to other services to customers. 30% of the overhead costs of the branch are estimated to be applicable to the processing of ‘Vehicle Loan’ applications and ‘Education Loan’ applications each.
Branch is having four employees at a monthly salary of ₹ 50,000 each, exclusively for processing of Vehicle Loan applications and two employees at a monthly salary of ₹ 70,000 each, exclusively for processing of Education Loan applications.
In addition to above, following expenses are incurred by the Branch:

• Branch Manager who supervises all the activities of branch, is paid at ₹ 90,000 per month,
• Legal charges, Printing & stationery and Advertising Expenses are incurred at ₹ 30,000, ₹ 12,000 and ₹ 18,000 respectively for a month.
• Other Expenses are ₹ 10,000 per month.

You are required to:
(i) Compute the cost of processing a Vehicle Loan Application on the assumption that 496 Vehicle Loan applications are processed each month.
(ii) Find out the number of Education Loan Applications processed, if the total processing cost per Education Loan Application is same as in the Vehicle Loan Application as computed in (i) above.
(c) MM Ltd. uses 7500 valves per month which is purchased at a price of ₹ 1.50 per unit. The carrying cost is estimated to be 20% of average inventory investment on an annual basis. The cost to place an order and getting the delivery is ₹ 15. It takes a period of 1.5 months to receive a delivery from the date of placing an order and a safety stock of 3200 values is desired.
You are required to determine:
(i) The Economic Order Quantity (EOQ) and the frequency of orders,
(ii) The reorder point.
(iii) The Economic Order Quantity (EOQ) if the valve costs ₹ 4.50 each instead of ₹ 1.50 each.
(Assume a year consists of 360 days)
(d) ABC Ltd. sells its Product ‘Y’ at a price of ₹ 300 per unit and its variable cost is ₹ 180 per unit. The fixed costs are ₹ 16,80,000 per year uniformly incurred throughout the year. The Profit for the year is ₹ 7,20,000.
You are required to calculate:
(i) BEP in value (₹) and units,
(ii) Margin of Safety,
(iii) Profits made when sales are 24,000 units,
(iv) Sales in value (₹) lo be made to earn a net profit of ₹ 10,00,000 for the year. (Marks 4 × 5 = 20)
(a) Statement of cost per batch and per order
No. of batch = 1600 units ÷ 80 units = 20 batches.

 Particulars Cost per Batch Total cost Direct Material cost 4,250 85,000 Direct wages 500 10,000 Lab set up cost 1,400 28,000 Production overheads (20% of direct wages) 100 2,000
 Particulars Cost per Batch Total cost Total Production cost Add: S&D and Administrative overheads (20% of total production cost) 6,250 1,250 1,25,000 25,000 Total cost Add: Profit (1/4 on sales i.e. 1/3 on cost) 7,500 2,500 1,50,000 50,000 Selling price 10,000 2,00,000

(i) Total sales value = 2,00,000
(ii) Selling price p.u. = $$\frac{2,00,000}{1,600}$$ = ₹ 125/unit

(b)

(i) Cost of processing a vehicle loan = $$\frac{2,48,000}{496 \text { loans }}$$ = ₹ 500
(ii) Given that cost of processing an education loan is same as cost of pro¬cessing a vehicle loan
∴ No of education loan processed = $$\frac{1,88,000}{500 / \text { loan }}$$ = 376 loans

(c) Annual Requirement = 7500 × 12 months = 90,000 units
Ordering cost = ₹ 15
Carrying cost = ₹ 0.3 (1.5/unit × 2096)
(Per unit)

(i) Calculation of Economic Order Quantity
EOQ = $$\sqrt{\frac{2 \mathrm{AO}}{\mathrm{C}}}$$
= $$\sqrt{\frac{2 \times 90,000 \times 15}{0.3}}$$
= 3000 units
Frequency of orders = $$\frac{90,000}{3,000} (ii) EOQ when purchase cost is ₹ 4.5 each instead of ₹ 1.5 each EOQ = [latex]\frac{\sqrt{2 \mathrm{AO}}}{\mathrm{C}}$$
= $$\frac{\sqrt{2 \times 90,000 \times 15}}{0.9}$$ = 1732 units
Calculation of carrying cost ⇒ 20% of ₹ 4.5/unit = ₹ 0.9

(iii) Calculation of Re-Order Point
= Safety stock + Average lead Lime consumption
= 3,200 + [$$\frac{90,000}{360 \text { days }}$$ × 45 days]
= 14,450 units.

(d)
(i) Calculation of Break Even Point:

(ii) Margin of Safety = $$\frac{\text { Current sales }- \text { Break even sales }}{\text { Current sales }}$$
= $$\frac{20,000-14,000}{20,000}$$
= 30%

(iii) Calculation of profit when sales are 24,000 units

(iv) Calculation of sales to earn net profit of ₹ 10,00,000
Total contribution = Fixed cost + Expected profit
= 16,80,000 + 10,00,000
= ₹ 26,80,000
No. of units = $$\frac{\text { Total contribution }}{\text { Contribution per unit }}$$
= $$\frac{₹ 26,80,000}{₹ 120}$$
= 22,333 units
Total Sales = 22,333.333 × ₹ 300 = ₹ 67,00,000

Question 2.
(a) USP Ltd. is the manufacturer of ‘double grip motorcycle tyres’. In the manufacturing process, it undertakes three different jobs namely, Vulcanising, Brushing and Striping. All of these jobs require the use of a special machine and also the aid of a robot when necessary. The robot is hired from outside and the hire charges paid for every six months is ₹ 2,70,000. An estimate of overhead expenses relating to the special machine is given below :

• Rent for a quarter is ₹ 18,000.
• The cost of the special machine is ₹ 19,20,000 and depreciation is charged @ 10% per annum on straight line basis.
• Other indirect expenses are recovered at 20% of direct wages.

The factory manager has informed that in the coming year, the total direct wages will be ₹ 12,00,000 which will be incurred evenly throughout the year.
During the first month of operation, the following details are available from the job book:

Number of hours the special machine was used
Jobs-Without the aid of the robot-With the aid of the robot

 Vulcanising 500 400 Brushing 1000 400 Striping – 1200

You are required to :
(i) Compute the Machine Hour Rate for the company as a whole for a month (A) when the robot is used and (B) when the robot is not used.
(ii) Compute the Machine Hour Rate for the individual jobs i.e. Vulcanising, Brushing and Striping. (10 Marks)
(b) A skilled worker, in PK Ltd. is paid a guaranteed wage rate of ₹ 15.00 per hour in a 48-hour week. The standard time to produce a unit is 18 minutes. During a week, a skilled worker – Mr. ‘A’ has produced 200 units of the product. The Company has taken a drive for cost reduction and wants to reduce its labour cost.
You are required to:
(i) Calculate wages of Mr. ‘A’ under each of the following methods :
A. Time rate,
B. Piece-rate with a guaranteed weekly wage,
(ii) Suggest which bonus plan i.e. Halsey Premium Plan or Rowan Premium Plan, the company should follow. (6 Marks)
(c) XYZ Ltd. is engaged in manufacturing two products – Express Coffee and Instant Coffee. It furnishes the following data for an year:

The annual overheads are as under:

 Particulars ₹ Machine Processing costs 7,00,000 Set up related costs 7,68,000 Purchase related costs 6,80,000

You are required to :
(i) Compute the costs allocated to each product – Express Coffee and Instant Coffee from each activity on the basis of Activity-Based Costing (ABC) method.
(ii) Find out the Overhead cost per unit of each product – Express Coffee and Instant Coffee based on (i) above. (4 Marks)
(a)
Working Notes
(i) Total special machine hours used
(500 + 1000 + 400 + 400 + 1200) = 3,500

(ii) Total special machine hrs. without aid of robot
(500 + 1000) = 1,500

(iii) Total special machine hrs. with aid of robot
(400 + 400 + 1200) = 2,000

(iv) Total overheads of special machine per month
Rent (₹ 18,000 ÷ 3 months) = 6,000
Depreciation (19,20,000 × 10% × 1/12) 16,000
Other indirect expenses
(20% of 12,00,000 × 1/12) = 20,000
Total = 42,000

(v) Robot hire changes
= (2,70,000 ÷ 6 months) – 45,000

(vi) Overheads for using special machines without robot
= $$\frac{₹ 42,000}{3,500 \text { hrs. }}$$ × 1500 hrs. = 18,000

(vi) Overheads for using special machines with robot.
= $$\frac{42,000}{3,500 \mathrm{hrs}}$$ × 2000 hrs. + 45,000 = ₹ 69,000

(d) Computation of machine hr. rate for the firm as a whole for the month
When the robot is used = $$\frac{₹ 69,000}{2,000}$$ = ₹ 34.50
When the robot is not used = $$\frac{₹ 18,000}{1500}$$ = ₹ 12

(b) Computation of machine hour rate for individual job.

(i) Calculation of wages of Mr.A
A. Time rate
48 hrs. × ₹ 15/hr = ₹ 720

B. piece – rate with a guaranteed weekly wage.
Std. units/hr. = $$=\frac{60 \text { minutes } / \mathrm{hr} .}{18 \text { minute } / \text { unit }}$$ = 3.33 units/hr.
∴ Piece rate = $$\frac{₹ 15 / \mathrm{hr} .}{3.33 \text { units/hr. }}$$ = ₹ 4.5/unit
Wages = 200 units × ₹ 4.5/units = ₹ 900
Therefore, Mr. A will be paid ₹ 900 as it exceeds the minimum guaranteed weekly wage of ₹ 720.

Standard time for actual output
= $$\frac{200 \text { units } \times 18 \text { minutes } / \text { unit }}{60 \text { minutes } / \mathrm{Hr} .}$$
= 60 Hrs.
∴ Time saved = Time allowed – Time taken
= 60 Hrs. – 48 Hrs.
= 12 Hrs.
= TT × TR + 50% of TS × TR
= 48 × ₹ 15/hr. + (50% of 12 hr.) × ₹ 15/hr.
= ₹ 810

= TT × TR + $$\frac{\mathrm{TT}}{\mathrm{TA}}$$ × TS × TR
= 48 × ₹ 15/hr. + $$\frac{48}{60}$$ × 12 × ₹ 15/hr.
= ₹ 864

(ii) Rowan scheme of premium bonus is a suitable incentive scheme for the company. If this scheme is adopted, the entire gains due to time saved by a worker will not pass to them.

Another feature is that a worker cannot increase his earnings or bonus by merely increasing its work speed. The reason for this is that the bonus under Rowan scheme is maximum when time taken by a worker on a job is half of the time allowed.

Lastly, Rowan scheme provides a safeguard in case of any loose function of the standards by rate-setting department.

(c)
(i) Allocation of each product on the basis of ABC

Question 3.
(a) XYZ Construction Ltd. has obtained a contract of ₹ 25,00,000 in the Financial Year 2021 -22. The work on the contract commenced immediately and it is expected that the contract will be completed by 31st March, 2023. Chief accountant of the company has provided following information related to the Contract:

Following additional information is also available:

• A part of plant costing ₹ 12,000 was scrapped and written-off in the F.Y. 2021-22.
• The value of Plant-at-Site on 31st March, 2022 was ₹ 18,000.
• Company would have to spend an additional sum of ₹ 80,000 on the plant in F.Y. 2022-23 and the residual value of the plant on the completion of contract would be ₹ 10,000.
• A part of material costing ₹ 30,000 was scrapped and sold for ₹ 20,000 in F.Y. 2021-22.
• The value of Material-at-Site on 31st March, 2022 was ₹ 17,000.
• Cash received on account till 31st March, 2022 was ₹ 13,50,000 representing 90% of the work certified.
• The cost of work uncertified on 31st March, 2022 was valued at 20% of work certified.

You are required to:
(i) Prepare a Contract Account for the year ended on 31st March, 2022.
(ii) Calculate Estimated Total Profit on this Contract. (10 Marks)
(b) N Ltd. produces a product which passes through two processes – Process-I. and Process-II, The company has provided following information related to the Financial Year 2021-22:

 Process I Process II: Raw Material @ ₹ 65 per units Direct Wages ₹ 1,40,000 ₹1,30,000 Direct Expenses 30% of Direct Wages 35% of Direct Wages Manufacturing Overheads ₹ 21,500 ₹ 24,500 Realisable value of scrap per unit ₹ 4.00 ₹ 16.00 Normal Loss 250 units 500 units Units transferred to Process II/finished stock 6,000 units 5,500 units Sales – 5,000 units

There was no opening or closing stock of work-in-progress.
You are required to prepare:
(i) Process-I Account
(ii) Process-II Account
(iii) Finished Stock Account (10 Marks)
(a)
(i) Contract A/c for year ended on 31st March, 2022

(ii) Calculation of estimated total profit on the contract.

(b)

Working Notes:
1. Calculation of cost per unit of completed units and abnormal loss :
= $$\frac{6,26,000-1,000}{6,500-250}$$ = ₹ 100 Process – I

Question 4.
(a) An agriculture based company having 210 hectares of land is engaged in growing three different cereals namely, wheat, rice and maize annually. The yield of the different crops and their selling prices are given below:

 Wheat Rice Maize Yield (in kgs per hectare) 2,000 500 100 Selling price (₹ per kg) 20 40 250

The variable cost data of different crops are given below:
(All figures in ₹per kg)

 Crop Labour Charges Packing Materials Other variable expenses Wheat 8 2 4 Rice 10 2 1 Maize 120 10 20

The company has a policy to produce and sell all the three kinds of crops. The maximum and minimum area to be cultivated for each crop is as follows:

 Crop Maximum area (in hectares) Minimum Area (in hectares) Wheat 160 100 Rice 50 40 Maize 60 10

You are required to:
(i) Rank the crops on the basis of contribution per hectare.
(ii) Determine the optimum product mix considering that all the three cereals are to be produced.
(iii) Calculate the maximum profit which can he achieved if the total fixed cost per annum is ₹ 21,45,000.
(Assume that there are no other constraints applicable to this company) (10 Marks)
(b) PNME Ltd. manufactures two types of masks- ‘Disposable Masks’ and ‘Cloth Masks’. The cost data for the year ended on 31 st March, 2022 is as follows:

 ₹ Direct Materials 12,50,000 Direct Wages 7.00,000 Production Overhead 4.00,000 Total 23,50,000

It is further ascertained that:

• Direct material cost per unit of Cloth Mask was twice as m uch of Direct material cost per unit of Disposable Mask.
• Direct wages per unit for Disposable Mask were 60% of those for Cloth Mask.
• Production overhead per unit was at same rate for both the types of the masks.
• Selling cost was ₹ 2 per Cloth Mask.
• Selling Price was ₹ 35 per unit of Cloth Mask.
• No. of units of Cloth Masks sold- 45,000
• No. of units of Production of:

You are required to prepare a cost sheet for Cloth Masks showing :
(i) Cost per unit and Total Cost,
(ii) rofit per unit and Total Profit. (10 Marks)
(a)
(i) Calculation of contribution per hectare.

(ii) Determination of optimum product mix
First of all, minimum area required for each crop will be utilised i.e.
100 for Wheat
40 for Rice
10 for maize
150 Hectares
Now, we are left with 60 Hectare of land (210-150), which will be utilised on the basis of ranking.
Firstly , it will be utilised for cultivation of rice, as it gives highest contribution.
Therefore 10 acres of land will be cultivated for rice.
Afterwards, remaining 50 Acres of land will be allocated for cultivation of wheat, as it gives 2nd highest contribution.
Therefore mix will be as follows:
Wheat 100 + 50 = 150
Rice 40 + 10 = 50
Maize 10 + 0 = 10
= 210 Hectares

(iii) Project will be maximum if optimum mix is followed.

(b)

Working Notes:
Direct material cost per unit of Disposable mask is x
Direct material cost per unit of cloth mask is 2x
To, Direct material cost
= (2x × 50,000) + (x ×, 1,50,000) = ₹ 12,50,000
= 1,00,000 x + 1,50,000 x = ₹ 12,50,000
x = ₹5
Therefore, Direct material cost per unit of cloth mask = 2x = ₹ 10

2. Direct wages per unit of cloth mask = y
Direct wages per unit of disposable mask = 0.6y
= (y × 50,000) + (0.6y × 1,50,000) = ₹ 7,00,000
= 1,40,000y = ₹ 7,00,000
y = ₹5

3. Production overhead per unit = ₹ 4,00,000
50,000 + 1,50,000
= ₹ 2

Question 5
(a) Y Ltd. manufactures “Product M” which requires three types of raw materials “A”, “B” & “C”. Following information related to 1st quarter of the F.Y. 2022-23 has been collected from its books of account. The standard material input required for 1,000 kg of finished product ‘M’ are as under:

During the period, the company produced 20,000 kg of product ‘M’ for which the actual quantity of materials consumed and purchase prices are as under:

 Material Quantity (Kg.) Purchase price per Kg. (₹) A 11,000 23 B 7,500 48 C 4,500 60

You are required to calculate:
(i) Material Cost Variance
(ii) Material Price Variance for each raw material and Product ‘M’
(iii) Material Usage Variance for each raw material and Product ‘M’
(iv) Material Yield Variance
Note: Indicate the nature of variance i.e. Favourable or Adverse. (10 Marks)
(b) ‘X’ Ltd. follows Non-Integrated Accounting System. Financial Accounts of the company show a Net Profit of ₹ 5,50,000 for the year ended 31st March, 2022. The chief accountant of the company has provided following information from the Financial Accounts and Cost Accounts:

 Particulars (₹) (i) Legal Charges provided in financial accounts 15,250 (ii) Interim Dividend received credited in financial accounts 4,50,000 (iii) Preliminary Expenses written off in financial accounts 25,750 (iv) Over recovery of selling overheads in cost accounts 11,380 (v) Profit on sale of capital asset credited in financial accounts 30,000 (vi) Under valuation of closing stock in cost accounts 25,000 (vii) Over recovery of production overheads in cost accounts 10,200 (viii) Interest paid on Debentures shown in financial accounts 50,000

Required:
Find out the Profit (Loss) as per Cost Accounts by preparing a Reconciliation Statement. (5 Marks)
(c) ASR Ltd. mainly produces Product ‘L’ and gets a by-Product *M’ out of a joint process. The net realizable value of the by-product is used to reduce the joint production costs before the joint costs are allocated to the main product. During the month of October 2022, company incurred joint production costs of ₹ 4,00,000. The main Product ‘L’ is not marketable at the split off point. Thus, it has to be processed further. Details of company’s operation are as under:

 Particulars Product L By Product M Production (units) 10,000 200 Selling pricing per kg ₹ 45 ₹ 5 Further processing cost ₹ 1,01,000 –

You are required to find out:
(i) Profit earned from Product ‘L’.
(ii) Selling price per kg of product ‘L’ if the company wishes to earn a profit of ₹ 1,00,000 from the above production. (5 Marks)
(a)

(i) Material cost variance = SQ × SR – AQ × AR.
= 8,40,000 – 8,83,000
= 43,000(A)

(ii) Material Price variance
Material A = AQ(SP – AP)
= 11,000 (25 – 23)
= 22,000 (F)
Material B = 7,500 (45 – 48)
= 22,500 (A)
Material C = 4500 (55 – 60)
= 22,500 (A)
Product M = 22,000 (F) + 22,500 (A) + 22,500 (A)
= 23,000 (A)

(iii) Material Usage variance
Material A = SP (SQ – AQ)
= 25(10,000 – 11,000)
= 25,000 (A)
Material B = 45(7,000 – 7,500)
= 22,500 (A)
Material C = 55(5,000 – 4,500)
= 27,500 (F)
Product M = 25,00(A) + 22,500 (A) + 27,500 (F)
= 20,000 (A)

(iv) Material yield variance
Std. Mix for Actual Qty. (RSQ)
A = 23,000 × $$\frac{10,000}{22,000}$$ = 10,455
B = 23,000 × $$\frac{17000}{22,000}$$ = 7,318
C = 23,000 × $$\frac{5000}{22,000}$$ = 5,227
Material Yield Variance = (SQ – RSQ) × SP
Material A = (10,000 – 10,455) × 25 = 11,375 (A)
Material B = (7,000 – 7318) × 45 = 14.310(A)
Material C = (5,000 – 5227) × 55 = 12.485(A)
Total = 37.170(A)

OR

(b)

(c) (i) Net realisable value of by product M
= 200 units × ₹ 5/ unit
= ₹ 1,000
Joint cost allocable to product L
= ₹ 4,00,000 – ₹ 1,000
= ₹ 3,99,000.
Profit earned from product L
Sales (10,000 × ₹ 45) = 4,50,000
Less: Allocable joint cost = (3,99,000)
Further processing cost = (1,01,000)
(50,000)

Therefore there is loss of ₹ 50,000

(ii) If company wishes to earn a profit of ₹ 1,00,000, then selling price should be:
$$\frac{3,99,000+1,01,000+1,00,000}{10,000 \text { units }}$$ = ₹ 60/ unit

Question 6.
Answer any four of the following :
(a) Which system of inventory management is known as ‘Demand pull’ or ‘Pull through’ system of production ? Explain. Also, specify the two principles on which this system is based.

(b) Indicate, for following items, whether to be show n in the Cost Accounts or Financial Accounts:
(i) Preliminary expenses written off during the year
(ii) Interest received on bank deposits
(iii) Dividend, interest received on investments
(iv) Salary for the proprietor at notional figure though not incurred
(v) Charges in lieu of rent where premises are owned
(vi) Rent receivables
(vii) Loss on sale of Fixed Assets
(viii) Interest on capital at notional figure though not incurred
(ix) Goodwill written off
(x) Notional Depreciation on the assets fully depreciated for which book value is Nil.

(c) PP Limited is in the process of implementation of Activity Based Costing System in the organisation. For this purpose, it has identified the following Business Functions in its organisation :
(i) Research and Development
(ii) Design of Products, Services and Procedures
(iii) Customer Service
(iv) Marketing
(v) Distribution
You are required to specify two cost drivers for each Business Function Identified above.
(d) Define Budget Manual. What are the salient features of Budget Manual?

(e) Mention the cost units (physical measurements) for the following industry/product:
(i) Automobile
(iii) Brickworks
(iv) Power
(v) Steel
(vii) Chemical
(viii) oil
(ix) Brewing
(x) Cement (Marks 4 × 5 = 20)
(a) ‘Just in Time’ is a system of inventory management with an approach to have a zero inventories in stores. According to this approach material should only be purchased when it is actually required for production.

• This system is also known as “Demand pull” or “Pull Through” system of production.
Note: JIT is based on two principles,
(i) Produce goods only when it is required.
(ii) The product should be delivered to customers at the time only when they want.

(b) Items to be shown in cost accounts.

• Salary for the proprietor at notional figure though not incurred.
• Charges in lieu of rent where premises are owned.
• Interest on capital at notional figure though not incurred.
• Notional depreciation on the assets fully depreciated for which book value is NIL.

Note: Items to be shown in financial accounts.

• Primary expenses written off during the year.
• Interest received on bank deposits.
• Dividend, interest received on investments.
• Rent receivables.
• Loss on sale of fixed assets.
• Goodwill written off.

(c)

 Business Functions Cost Driver Research and Development Number of research projects Personnel hours on a project Design of products, services and procedures Number of products in design Number of parts per products Number of engineering hours Customer service Number of service calls Number of products serviced Hours spent on servicing products Marketing Number of advertisements Number of Sales personnel Sales revenue Distribution Number of units distributed Number of customers

(d) Budget Manual:
The Budget manual is a document or booklet which contain guidelines for the preparation of budget in an organization.

CIMA, London, defines budget manual as, “A document which sets out the responsibilities of the persons engaged in, the routine of, and the forms and records required for, budgetary control.”
Note: Salient features of budget manual:

(e)

 Industry Cost unit (Physical Measurements) Automobile Number of vehicles Gas Cubic Meter Bricks works Thousand Power Kilo-watt hour Steel Tonne Transport Tonne – kilometer, passenger kilometer Chemical Litre, Kilogram, Tonne Oil Barrels Brewing Cement Tonnes, kilogram

## Money Market Notes – CA Inter Economics Notes

Money Market Notes – CA Inter Economics Notes is designed strictly as per the latest syllabus and exam pattern.

## Money Market Notes – CA Inter ECO Notes

1. Functions of Money:

• Money is a convenient medium of exchange,
• Money is an explicitly defined unit of value or ‘common measure of value’ or ‘common denominator of value’,
• Money serves as a unit or standard of deferred payment.

2. General Characteristics of Money:

• Generally acceptable,
• Durable or long-lasting,
• Effortlessly recognizable,
• Difficult to counterfeit i.e. not easily reproducible by people,
• Relatively scarce, but has elasticity of supply,
• Portable or easily transported,
• Possessing uniformity; and
• Divisible into smaller parts.

3. The Demand for Money:
If people desire to hold money, we say there is demand for money. Demand for money is actually demand for liquidity and demand to store value.

4. Classical Approach: The Quantity Theory of Money (QTM):

The quantity theory of money, one of the oldest theories in Economics, was first propounded by Irving Fisher of Yale University in his book ‘The Purchasing Power of Money’published in 1911 and later by the neoclassical economists. Fisher’s version, also termed as ‘equation of exchange ‘or ‘transaction approach ’ is formally stated as follows:

MV = PT
Where,
M = the total amount of money in circulation
V = transactions velocity of circulation
P = average price level (P = MV/T)
T = the total number of transactions.
Fisher’s extended the equation:
MV + M’V’ = PT
Where,
M’ = the total quantity of credit money
V’ = velocity of circulation of credit money

5. The Neo-classical Approach Or The Cambridge Approach:
In the early 1900’s Cambridge Economists Alfred Marshall, A.C. Pigou, D.H. Robertson and John Maynard Keynes put forward a fundamentally different approach to quantity theory, known as neoclassical theory or cash balance approach. The Cambridge version holds that money increases utility in the following two ways:

• Enabling the possibility of split-up of sale and purchase to two different points, and
• Being a hedge against uncertainty.

The Cambridge equation:
Md = k PY
Where,
Md = demand for money
Y = real national income
P = average price level
PY = nominal income
k = proportion of nominal income (PY) that people want to hold as cash balances

6. The Keynesian Theory of Demand for Money:
Keynes’ theory of demand for money is known as ‘Liquidity Preference Theory ’. According to Keynes, people hold money (M) in cash for three motives:

• Transactions motive,
• Precautionary motive, and
• Speculative motive.

7. Inventory Approach to Transaction Balances:
Baumol(l 952) and Tobin {1956) developed a deterministic theory of transaction demand for money, known as Inventory Theoretic Approach, in which money or Veal cash balance’ was essentially viewed as an inventory held for transaction purposes. Inventory models assume that there are two media for storing value:

• Money and
• An interest-bearing alternative financial asset.

There is a fixed cost of making transfers between money and the alternative assets and Liquid financial assets other than money offer a positive return.
Therefore, people hold an optimum combination of bonds and cash balance, i. e., an amount that minimizes the opportunity cost.

8. Friedman’s Restatement of The Quantity Theory:
Milton Friedman (1956) extended Keynes’ speculative money demand within the framework of asset price theory.

• The demand for money as nothing more than theory of demand for capital assets
• Demand for money is affected by the same factors as demand for any other asset, namely:
• Permanent income
• Relative returns on assets (which incorporate risk).

Friedman identifies the following four determinants of the demand for money:

• is a function of total wealth,
• is positively related to the price level, P,
• rises if the opportunity costs of money holdings decline,
• is influenced by inflation.

9. The demand for money as behaviour toward risk (Tobin’s Risk-Aversion Approach):
In his classic article, ‘Liquidity Preference as Behaviour towards Risk’(1958), Tobin established that the theory of risk-avoiding behaviour of individuals provided the foundation for:

• The liquidity preference and
• For a negative relationship between the demand for money and the interest rate.

According to Tobin, the optimal portfolio structure is determined by:

• The risk/reward characteristics of different assets,
• The taste of the individual in maximizing his utility consistent with the existing opportunities.
Demand for money as a store of wealth will decline with an increase in the interest rate.

10. Measurement of Money Supply:
From April 1977, the RBI has been publishing data on four alternative measures of money supply denoted by Ml, M2, M3 and M4 besides the reserve money:
M1 = Currency notes and coins with the people + demand deposits
of banks (Current and Saving deposit accounts) + other deposits with the RBI
M2 = M1 + savings deposits with post office savings banks
M3 = M1 + net time deposits with the banking system
M4 = M3 + total deposits with the Post Office Savings Organization
(excluding National Savings Certificates)

Following the recommendations of the Working Group on Money (1998), the RBI has started publishing a set of four new monetary aggregates:

Reserve Money = Currency in circulation + Bankers’ deposits with the RBI + Other deposits with the RBI
= Net RBI credit to the Government + RBI credit to the Commercial sector + RBI’s Claims on banks+RBI’s net

Foreign assets + Government’s Currency liabilities to the public-RBI’s net non monetary Liabilities
NM1 = Currency with the public+Demand deposits with the banking
system + ‘Other’deposits with the RBI
NM2 = NM1 + Short-term time deposits of residents (including and up to contractual maturity of one year)
NM3 = NM2 + Long-term time deposits of residents + Call/Term funding from financial institutions

‘Liquidity’ aggregates in addition to the monetary aggregates:
L1 = NM3 + All deposits with the post office savings banks(excluding National Savings Certificates)
L2 = L1 +Term deposits with term lending institutions and
refinancing institutions (FIs) + Term borrowing by FIs + Certificates of deposit issued by FIs
L3 = L2 + Public deposits of non-banking financial companies

11. Money Multiplier:
Money Multiplier (m) = Money supply ÷ Monetary base

12. The Money Multiplier Approach to Supply of Money:
The money multiplier approach to money supply propounded by Milton Friedman and Anna Schwartz, (1963) considers three factors as immediate determinants of money supply, namely:

• The stock of high-powered money (H)
• The ratio of reserves to deposites, e = (ER/D) and
• The ratio of currency to depoists, c = (C/D)

To summarise the money multiplier approach, the size of the money multiplier is determined by the required reserve ratio (r) at the central bank, the excess reserve ratio (c) of commercial banks and the currency ratio (c) of the public. The lower these ratios are, the larger the money multiplier is.

13. The Credit Multiplier: Credit Multiplier = 1 ÷ Required Reserve Ratio

14. Monetary Policy Defined:
Monetary policy is essentially a programme of action undertaken by the monetary authorities, normally the central bank, to control and regulate the demand for and supply of money with the public and the flow of credit with a view to achieving predetermined macroeconomic goals.

15. The Monetary Policy Framework:

• The objectives of monetary policy,
• The analytics of monetary policy, and
• The operating procedure.

16. The Objectives of Monetary Policy:
The objectives of monetary policy generally coincide with the overall objectives of economic policy. In developing countries:

• Maintenance the economic growth,
• Ensuring an adequate flow of credit,
• Sustaining – a moderate structure of interest, and
• Creation of an efficient market for government securities.

17. Analytics of Monetary Policy:
The process or channels through which the change of monetary aggregates affects the level of production and prices etc. There are mainly four different mechanisms:

• The interest rate channel,
• The exchange rate channel,
• The quantum channel (relating to money supply and credit), and
• The asset price channel ie. via equity and real estate prices.

18. Operating Procedures and Instruments:
The operating framework relates to all aspects of implementation of monetary policy. It primarily involves three major aspects, namely,

• Choosing the operating target,
• Choosing the intermediate target, and
• Choosing the policy instruments.

The operating target refers to the variable (e.g. inflation) that monetary policy can influence with its actions.
The intermediate target (e.g. economic stability) is a variable which the central bank can hope to influence to a reasonable degree through the operating target and which displays a predictable and stable relationship with the goal variables.

The monetary policy instruments are the various tools that a central bank can use to influence money market and credit conditions and pursue its monetary policy objectives.

19. Cash Reserve Ratio (CRR):
Cash Reserve Ratio (CRR) refers to the fraction of the total net demand and time liabilities (NDTL) of a scheduled commercial bank in India which it should maintain as cash deposit with the Reserve Bank.

20. Statutory Liquidity Ratio (SLR):
As per the Banking Regulations Act, 1949, all scheduled commercial banks in India are required to maintain a stipulated percentage of their total Demand and Time Liabilities (DTL)/Net DTL (NDTL) in one of the following forms:

• Cash
• Gold, or
• Investments in unencumbered Instruments

LAF is a facility extended by the Reserve Bank of India to the scheduled com-mercial banks (excluding RRBs) and primary dealers to avail of liquidity in case of requirement on an overnight basis against the collateral of government securities including State Government securities.

22. Marginal Standing Facility (MSF):
The Marginal Standing Facility (MSF) announced by the Reserve Bank of India “
(RBI) in its Monetary Policy, 2011-12 refers to the facility under which scheduled commercial banks can borrow additional amount of overnight money from the central bank over and above what is available to them through the LAF window by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a limit at a penal rate of interest.

23. Market Stabilisation Scheme (MSS):
This instrument for monetary management was introduced in 2004 following – a MoU between the Reserve Bank of India (RBI) and the Government of India (GOI) with the primary aim of aiding the sterilization operations of the RBI. Under this scheme, the Government of India borrows from the RBI and issues treasury-bills/dated securities for absorbing excess liquidity from the market arising from large capital inflows.

24. The Monetary Policy Framework Agreement:
Agreement reached between the Government of India and the RBI on the maximum tolerable inflation rate that the RBI should target to achieve price stability. The amended RBI Act (2016) provides for a statutory basis.

• The inflation target is to be set, once in every five years
• 4 percent CPI inflation as the target for August 5, 2016 to March 31, 2021
• Upper tolerance limit of 6 percent and the lower tolerance limit of 2 percent
• Publish a Monetary Policy Report every six months,
• The following factors are notified by the CG:
• The average inflation is more than the upper tolerance level for any three consecutive quarters; or
• The average inflation is less than the lower tolerance level for any three consecutive quarters.

25. The Monetary Policy Committee (MPC):
An important landmark in India’s monetary history is the constitution of an empowered six-member Monetary Policy Committee (MPC) in September, 2016 consisting of the RBI Governor (Chairperson), the RBI Deputy Governor in charge of monetary policy, one official nominated by the RBI Board and the remaining three Central Government nominees representing the Government of India who are persons of ability, integrity and standing, having knowledge and experience in the held of Economics or banking or finance or monetary policy.

26. Repurchase Options or in short ‘Repo’: is defined as ‘an instrument for borrowing funds by selling securities with an agreement to repurchase the securities on a mutually agreed future date at an agreed price which includes interest for the funds borrowed’.

27. Reverse Repo: is defined as an instrument for lending funds by purchasing securities with an agreement to resell the securities on a mutually agreed future date at an agreed price which includes interest for the funds lent.

28. Bank Rate: Under Section 49 of the Reserve Bank of India Act, 1934, the Bank Rate has been defined as ‘the standard rate at which the Reserve Bank is prepared to buy or rediscount bills of exchange or other commercial paper eligible for purchase under the Act’. The bank rate once used to be the policy rate in India i.e. the key interest rate based on which all other short term interest rates moved.

29. Open Market Operations: Open Market Operations (OMO) is a general term used for market operations conducted by the Reserve Bank of India by way of sale/purchase of Government securities to/from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis.