CA Intermediate

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]
Answer:
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]
Answer:
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]
Answer:

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]
Answer:
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 + ………………… + Distance_n) × (W₁ + W₂ + ……. + W_n/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]
Answer:
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]
Answer:
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]
Answer:
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]
Answer:
(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]
Answer:
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]
Answer:
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]
Answer:
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]
Answer:
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]
Answer:
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]
Answer:
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]
Answer:
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]
Answer:
(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]
Answer:
(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]
Answer:
(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:
1. Wages paid to loading and unloading labours
= 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]
Answer:
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]
Answer:
(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]
Answer:
(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]
Answer:
(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]
Answer:
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]
Answer:
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]
Answer:
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]
Answer:
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]
Answer:
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]
Answer:
(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]
Answer:
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:

(2) Total Overhead = Repairs & maintenance + Administration overheads
= ₹ 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]
Answer:
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
Answer:
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 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
AH_worked = Actual Hours worked
AH_paid = Actual Hours paid
AR = Actual Rate of Labour
RSH = Revised Standard Hours = Standard Mix for the total Actual Hours worked.
Note: AH_paid = AH_worked, where hours paid and hours worked is same.

Variable Overheads Variances

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

Fixed Overheads Variances

Theory Questions

Question 1.
What are the types of standards?
Answer:
(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]
Answer:
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]
Answer:
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]
Answer:
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]
Answer:
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]
Answer:

• 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]
Answer:

• 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]
Answer:
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]
Answer:
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]
Answer:
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
Answer:
(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]
Answer:
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]
Answer:
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]
Answer:
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]
Answer:
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]
Answer:

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.
Answer:
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]
Answer:
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]
Answer:
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)
= ₹ 10,600 (Adverse)

(iv) Direct Labour Efficiency Variance = SR (SH – AH)
= ₹ 80 (1,000 units × 5 hrs. – 5,300 hrs.)
= ₹ 24,000 (Adverse)

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]
Answer:
(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
Answer:
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:
(i) Fixed overhead variance
(ii) Fixed overhead expenditure variance
(iii) Fixed overhead volume variance
(iv) Fixed overhead efficiency variance [CA Into, Nov. 2018, 5 Mm ks]
Answer:
(i) Fixed Overhead Variance =Absorbed fixed overhead – Actual fixed overhead
= [(₹ 5,00,000 × 5,000) × 4,800] – ₹ 4,90,000
= ₹ 10,000 (A)

(ii) Fixed Overhead Expenditure Vari- Budgeted fixed overhead – Actual fixed ance overhead
= ₹ 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)

(iv) Fixed Overhead efficiency Variance = Standard fixed overhead – Budgeted fixed overhead for Actual days
= ₹ 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]
Answer:
(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)

(v) Expenditure Variance = Budgeted Overheads – Actual Overheads
= ₹ 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]
Answer:
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)

(iv) Exp. Variance = Budgeted Overheads – Actual Overheads
= ₹ 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)

(vi) Total fixed overhead variance = Absorbed fixed overhead – Actual fixed overhead
= ₹ 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:
(i) Fixed;Overhead:: Cost Variance:y – ₹ 2,800 (Adverse)
(ii) Fixed Overhead Volume Variance – ₹ 2,000 (Adverse)
(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:
(i) Fixed Overhead Expenditure
(ii) Actual Overheads Incurred Variance
(iii) Actual Hours for Actual Production
(iv) Fixed Overhead. Capacity Variance
(v) Standard hours for Actual Production
(vi) Fixed Overhead Efficiency Variance [CA Inter Nov. 2020, 10 Marks]
Answer:
(i) Fixed Overhead Exp. Variance = Fixed Overhead Cost Variance – Fixed Overhead Volume Variance
= ₹ 2,800 (A) – ₹ 2,000 (A)
= ₹ 800 (A)

(ii) Fixed Overhead Cost Variance 2,800 (A) Actual Overheads = Absorbed Fixed Overheads – Actual Fixed Overheads
= ₹ 10,000 – Actual Overheads
= ₹ 12,800

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

(iv) Fixed Overhead capacity variance = Budgeted Fixed Overheads for Actual Hours – Budgeted Fixed Overheads
= (₹ 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.

(vi) Fixed Overhead Efficiency Var. = Absorbed Fixed Overheads – Budgeted Fixed Overheads for Actual Hours
= ₹ 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]
Answer:
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]
Answer:
(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]
Answer:
(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)

(d) Total factory overhead variance = Factory overhead absorbed – Factory overhead incurred
= 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 incurred ₹ 2,24,400
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.
(b) Variable Overheads variances – Variable overhead Cost Variance, Variable overhead Efficiency Variance and Variable overhead Expenditure Variance.
(c) Labour variances – Labour Cost Variance, Labour Rate Variance and Labour Efficiency Variance. [CA Inter RTP Nov. 2021]
Answer:
(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)

(b) Variable Overheads variances Variable overhead cost Variance
= Standard variable overhead – Actual Variable Overhead
= (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

Variable overhead Expenditure Variance
= Variable Overhead at Actual Hours – Actual Variable Overheads
= 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
(v) Fixed overhead expenditure variance
(vi) Fixed overhead efficiency variance
(vii) Fixed overhead capacity variance.
Answer:
(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)

(v) Fixed overhead efficiency = Budgeted Overhead – Actual Overhead variance
= 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
(vii) Variable Overhead Cost Variance
(viii) Fixed Overhead Cost Variance [CA Inter Nov. 2011, Nov. 2013, 8 Marks]
Answer:
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)

(viii) Fixed Overhead Cost Variance = Absorbed Fixed Overhead – Actual Fixed Overhead
= (₹ 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]
Answer:
Overheads volume variance (in case of fixed overhead):
Standard fixed overheads per unit (SR): ₹ 3,000 (Given)
Actual production : 100 units
Standard production (capacity) : 200 units
Fixed Overhead Volume Variance = Absorbed overhead – Budgeted Overhead
= (₹ 3,000 × 100 units) – (₹ 3,000 × 200 units)
= ₹ 3,00,000 – ₹ 6,00,000
= ₹ 3,00,000 (Adverse)

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

For fixed overhead – Budgeted Overhead – Actual Overhead
= (₹ 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
= ₹ 4,00,000 (Adverse)

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.
Actual Variable Overheads Actual Fixed Overheads

You are required to calculate:
(i) Variable Overhead Variances:
(а) Variable overhead expenditure variance.
(b) Variable overhead efficiency variance.

(ii) Fixed Overhead Variances:
(a) Fixed overhead budget variance
(b) Fixed overhead capacity variance.
(c) Fixed overhead efficiency variance.

(iii) Control Ratios:
(a) Capacity ratio.
(b) Efficiency ratio. [CA Inter Jan. 2021, 10 Marks]
Answer:
(i) Variable overheads variance
(a) Variable overhead expenditure variance
= Std. overhead for Actual hours – Actual variable Overhead
= (\(\frac{₹ 1,06,080}{8,840}\) × 8,100) – ₹ 1,02,000
= ₹ 4,800 (A)

(b) Variable overhead efficiency variance
=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)

(ii) Fixed overhead variances
(a) Fixed overhead budget variance
= Budgeted overhead – Actual overhead
= ₹ 2,21,000 – ₹ 2,00,000
= ₹ 21,000 (F)

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

(c) Fixed overhead efficiency variance
= 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:
(i) Variable overhead efficiency variance
(ii) Variance overhead expenditure variance
(iii) Fixed overhead efficiency variance
(iv) Fixed overhead capacity variance. [CA Inter May 2012, May 2015, 8 Marks]
Answer:
(i) Variable Overhead efficiency variance :
= Standard Rate Per Hour × (Std. Hours – Actual Hours)
= ₹ 3 × (77,800 – 74,000)
= ₹ 11.400(F)

(ii) Variable Overhead expenditure variance:
= Actual Hours × (Std. Rate Per Hour – Actual Rate Per Hour)
= 74,000 × (₹ 3 3.1419)
= ₹ 10,500 (A)

(iii) Fixed overhead efficiency variance:
= Std. Rate Per Hour × (Std. Hours – Actual Hours)
= ₹ 1 × (77,800 – 74,000)
= ₹ 3,800 (F)

(iv) Fixed overhead Capacity variance:
= 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:
(i) Overhead Cost variance
(ii) Fixed Overhead Cost variance
(iii) Variable Overhead Cost variance
(iv) Fixed Overhead Volume variance
(v) Fixed Overhead Expenditure Variance
(vi) Calendar Variance [CA Inter Dec. 2021, 10 Marks]
Answer:
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
(i) Overhead Cost Variance
= Absorbed overheads – Actual Overheads
= [(₹ 10.90 + ₹ 5.60) × 8,000 units] – [₹ 1,21,520 + 55,680]
= ₹ 1,32,000 – ₹ 1,77,200
= ₹ 45,200 (A)

(ii) Fixed overhead Cost Variance
= Absorbed fixed overheads – Actual fixed overhead
= (₹ 10.90 × 8,000 units) – ₹ 1,21,520
= ₹ 87,200 – ₹ 1,21,250
= ₹ 34,320 (A)

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

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

(v) Fixed overhead Expenditure Variance
= 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]
Answer:
(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)

Overhead Expenditure or Budgeted Variance:
= Budgeted Overhead – Actual Overhead
= ₹ 98,000 – ₹ 90,000
= ₹ 8,000 (F)

Overhead Volume Variance:
= Recovered/Absorbed Overhead – Budgeted Overhead
= 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]
Answer:
(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 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]
Answer:
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]
Answer:
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]
Answer:
Definition of Inter-Process Profit and its advantages and disadvantages:
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:
Advantages:

• 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.

Disadvantages:

• 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]
Answer:
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]
Answer:
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]
Answer:
(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]
Answer:
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]
Answer:
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]
Answer:
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

Additional Information:
(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]
Answer:
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]
Answer:

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]
Answer:
(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]
Answer:
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]
Answer:

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%
Labour and Overhead – 60%
(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%
Wages and Overheads – 80%
(vi) Closing WIP 18,000 units
Degree of Completion:
Material – 100%
Wages and Overheads – 70%
(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]
Answer:
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
Overhead – ₹ 52,000
(iv) Units transferred to Process III – 51,000 units
(v) Closing WIP- 2,000 units (Degree of completion)
Consumables – 80%
Labour – 60%
Overhead – 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]
Answer:
(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]
Answer:
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
Production Overheads – ₹ 48,800

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]
Answer:
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]
Answer:
(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
(c) Overhead ₹ 1,76,400
Normal loss in the process = 2%.of input
Closing work-in-progress – 1,200 units

Degree of completion:
Materials – 100%
Labour – 50%
Overhead – 40%
Finished output – 39,500 units

Degree of completion of abnormal loss:
Material – 100%
Labour – 80%
Overhead – 60%
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]
Answer:
(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]
Answer:
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
Overhead – ₹ 1,80,700
(iv) Normal loss in the process – 2% of Input
(v) Work-in progress – 1,800 units
Degree of completion
Materials – 100%
Labour – 50%
Overhead – 40%
(vi) Finished output – 42,000 units
(vii) Degree of completion of abnormal loss:
Direct material – 100%
Labour – 80%
Overhead – 60%
(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]
Answer:

Question 18.
Answer the following:
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]
Answer:
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]
Answer:
(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]
Answer:
(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]
Answer:
(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]
Answer:
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 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.