COST ACCOUNTING

Suggested Answers
Intermediate Examinations – Autumn 2010

A.1 (a) Factory overheads cost per unit based on direct labour hours used:

Alpha Beta Gamma Total

Production (no. of units) A 12,000 20,000 45,000 77,000
Direct labour hours per unit 20 5 4
Total direct labour hours B 240,000 100,000 180,000 520,000
Allocation of overheads
(9,488,000/520,000 ×B) Rs. C 4,379,077 1,824,615 3,284,308 9,488,000
Cost per unit Rs. (C / A) 364.92 91.23 72.98

(b) Factory overheads cost per unit based on utilisation of facilities:

Allocation basis Alpha Beta Gamma Total

Production (no. of units) A 12,000 20,000 45,000 77,000
Machine hours per unit 6 8 10
Total machine hours *1 72,000 160,000 450,000 682,000
Units inspected 600 400 1,350 2,350
Per unit inspection hours 2 3 4
Total no. of hours for units
inspected *2 1,200 1,200 5,400 7,800
Overhead allocation:
Indirect wages:
- Machine maintenance Machine hours 63,343 140,763 395,894 600,000
- Stores Store consumption 144,000 54,000 162,000 360,000
- Quality control Inspected hours 72,000 72,000 324,000 468,000
- Cleaning and related services Factory space
utilisation 160,000 140,000 100,000 400,000
Fuel and power Machine hours 295,601 656,892 1,847,507 2,800,000
Depreciation on plant and machinery Machinery cost 600,000 400,000 300,000 1,300,000
Depreciation on building Factory space
(1,560,000-1,300,000) utilisation 104,000 91,000 65,000 260,000
Insurance on plant and machinery Cost of Machinery 110,769 73,846 55,385 240,000
Insurance on building Factory space
utilisation 24,000 21,000 15,000 60,000
Stores, spares and supplies consumed Actual 720,000 270,000 810,000 1,800,000
Rent, rates and taxes Factory space
utilisation 480,000 420,000 300,000 1,200,000
Total overheads B Rs. 2,773,714 2,339,500 4,374,786 9,488,000
Cost per unit (B/A) Rs. 231.14 116.98 97.22

A.2 Journal entries: Debit Credit

Rupees
5-Jun-2010 Raw material 12,750,000
Account payable (150,000 x 85) 12,750,000
(Cost of material purchased)
6-Jun-2010 Work in process 12,450,000
Raw material 12,450,000
(Issue of raw material to production)
12-Jun-2010 Raw material 415,000
Work in process 415,000
(Defective material returned from the production)
15-Jun-2010 Raw material 13,215,000
Account payable (150,000 x 88.1) 13,215,000
(Cost of material purchased)
17-Jun-2010 Cash (2,500 x 20) 50,000
Factory overheads 165,000
Raw material 215,000

Page 1 of 6
 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Autumn 2010

(Defective units sold as scrapped)

18-Jun-2010 Account payable 212,500
Raw material 212,500
(Defective material returned to the supplier)
19-Jun-2010 Work in process 430,050
Raw material 430,050
(Replacement of defective material to production by the store)
20-Jun-2010 Raw material 212,500
Account payable (2,500 x 85) 212,500
(Goods returned were replaced by the supplier)
21-Jun-2010 Work in process 12,900,000
Raw material 12,900,000
(Issue of raw material to production)
30-Jun-2010 Factory overheads - {500 x (86-30)} (obsolete items) 28,000
Factory overheads - (4,000 x 86) (shortages) 344,000
Raw material 372,000
(Cost of obsolete and shortages charged to factory overheads)

Receipts /(Issues)
Date Particulars
Quantity Rate Rupees
01-Jun-2010 Balance 100,000 80.00 8,000,000
05-Jun-2010 purchases 150,000 85.00 12,750,000
Balance 250,000 83.00 20,750,000
06-Jun-2010 Issues (150,000) 83.00 (12,450,000)
12-Jun-2010 Returned from production 5,000 83.00 415,000
15-Jun-2010 Purchases 150,000 88.10 13,215,000
Balance 255,000 86.00 21,930,000
17-Jun-2010 Defective goods sold (2,500) 86.00 (215,000)
18-Jun-2010 Returned to supplier (2,500) 85.00 (212,500)
Balance 250,000 86.01 21,502,500
19-Jun-2010 Replacement to production (5,000) 86.01 (430,050)
20-Jun-2010 Replacement by supplier 2,500 85.00 212,500
Balance 247,500 86.00 21,284,950

A.3 Variable cost per unit:

Qty. Rate Cost per unit

Kg. Rupees
Imported raw material 1.30 750 975.00
Local material 0.50 150 75.00
Total input 1.80 1,050.00
Sale of wastage {1.8-1.6-(0.05*1.8)} 0.11 80 (8.80)
Cost of material per unit 1,041.20
Skilled labour (2 hours @ Rs.300) 600.00
Overheads (2 hours @ Rs. 200) 400.00
Selling and administration cost 359.00
2,400.20
Required contribution margin:
Fixed overheads
- Depreciation on cost of additional capacity (3,000,000*10%) 300,000
- Incremental administration and other fixed overheads (170,000-150,000)*12 240,000
Required profit after tax Rs. 4,500,000
Gross profit required before tax (4,500,000/0.65) 6,923,077
Total contribution margin 7,463,077
Page 2 of 6
 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Autumn 2010

Sales price per unit at variable cost plus 25% (2,400.20*1.25) Rs. 3,000.25

Contribution margin per unit sale (3,000.25 – 2400.20) Rs. 600.05

Sales in units (7,463,077 / 600.05) Units 12,437

A.4 Marginal Costing Absorption Costing Marginal Costing Absorption Costing

Units Cost per unit Cost per unit Rupees
Sales 21,000 1,100 23,100,000 23,100,000
Cost of goods sold
Opening stock 950 300+300+45 300+300+45+333.33 612,750 929,414
Production for the year 22,150 648.5 648.5+306.09 14,364,275 21,144,169
Closing inventory 2,100 648.5 648.5+306.09 (1,361,850) (2,004,639)
13,615,175 20,068,944
Variable selling and
administration cost 21,000 157.89 3,315,690
Contribution margin / Gross profit 6,169,135 3,031,056
Selling and administration costs {(21,000x157.89} + 7,000,000 10,315,690
Fixed cost - production W -2 6,780,000
Fixed cost - Selling & administration (70%*10,000,000) 7,000,000
Net loss (7,610,865) (7,284,634)

Profit reconciliation:
In absorption costing fixed costs:
- Brought forward from the last year through opening inventory 950*333.33 (316,664)
- Carried forward to the next year through closing inventory 2,100*306.09 642,789
- Rounding of difference 106
(7,284,634) (7,284,634)
W-1: Variable cost per unit for 2010-11
Raw material (5*0.95*60*1.04) 296.40
Raw material inspection (5*0.95*2) 9.50
Labour (4*0.85*75*1.1) 280.50
Labour incentive cost 30%*(4*0.15*75*1.1) 14.85
Variable production overheads 15*1.05*3 47.25
Variable production costs 648.50
Variable selling and admin. costs (30%*10,000,000)/19,000 157.89
806.39

W-2: Fixed production cost for 2010-11

Annual fixed production overheads (6,000,000*1.08) 6,480,000
Training consultant cost 300,000
6,780,000
W-3:Fixed production cost per unit
Year ended June 30, 2010 6,000,000/18,000 333.33
Year ended June 30, 2011 6,780,000/22,150 306.09

W-4: Production for the year Units

Sales 21,000
Opening inventory 19,000* 5% (950)
Closing inventory 21,000*10% 2,100
Production for the year 22,150

Page 3 of 6
 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Autumn 2010

A.5 Small size Medium size Large size

Sales price 75.00 90.00 130.00
Direct material cost (25.00) (32.00) (35.00)
Variable overheads (5.00) (7.00) (8.00)
Contribution margin 45.00 51.00 87.00
Machine hours 2.00 4.00 5.00
Contribution margin per hour 22.50 12.75 17.40
Priority based on contribution per machine hour 1 3 2

Units to be produced: Medium Machine

Small size Large size
size hours
Minimum production - Units 100,000 100,000 100,000
Hours consumed for minimum production 200,000 400,000 500,000 1,100,000

Units in excess of minimum production in

CM priority:
Small size - Units 110,000 220,000
Large size - Units 80,000 400,000
Medium size – Units 20,000 80,000
Total 210,000 120,000 180,000 1,800,000

A.6 Variance
Quantity
Fav./(Adv.)
Description
Qty. Amount
Rate
in ‘000 Rupees in '000
Budgeted gross profit (600-125-200-50-10) 500 215 107,500
Actual gross profit (295,000-55,000-105,000-26,000-5,100) 103,900
Decrease in profit 3,600

Profit variation due to Favourable/(Adverse) variances: +/(-) in profit

1 Sales price variance

Actual sales at actual price 295,000
Actual sales at standard price 480 600 288,000 7,000

2 Sales volume variance

Actual units sold at standard profit 480 215 103,200
Budgeted units sold at standard profit 500 215 107,500 (4,300)

3 Material price variance

Actual quantity used at actual rate 55,000
Actual quantity used at standard rate 950 50 47,500 (7,500)

4 Material usage variance

Actual quantity used at standard rate 950 50 47,500
Standard quantity used at standard rate (480 × 2.5) 1,200 50 60,000 12,500

Page 4 of 6
 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Autumn 2010

5 Labour rate variance

Actual hours used at actual rate 105,000
Actual hours used at standard rate 990 100 99,000 (6,000)

6 Labour efficiency variance

Actual hours used at standard rate 990 100 99,000
Standard hours used at standard rate (480 × 2) 960 100 96,000 (3,000)

7 Factory overheads spending variance

Actual fixed and variable overheads 31,100
Budgeted overheads:
Budgeted fixed overheads 500 10 5,000
Variable overheads based on actual hours used at standard rate 990 25 24,750
29,750 (1,350)

8 Variable overheads efficiency variance

Actual hours used at standard rate 990 25 24,750
Standard hours used at standard rate (480×2) 960 25 24,000 (750)

9 Fixed overheads efficiency variance

Actual units produced 480 10 4,800
Standard production in actual hours (990/2) 495 10 4,950 (150)

10 Fixed overheads capacity variance

Capacity used at standard (990/2) 495 10 4,950
Capacity available 500 10 5,000 (50)
Decrease in profit (3,600)

A.7 Journal entries Debit Credit

Rupees in ‘000
Payroll expense 2,030.83
Provision for vacations pay (vacations availed during the month) 85.00
Payroll payable (1,635-193+85) 1,527.00
Contribution to provident fund payable (Co. & employees) 250.00
Provision for bonus 125.00
Provision for vacation pay 145.83
Employees’ income tax payable 40.00
Advance against salary 28.00
(To record payroll cost, liability and provisions)
Work in process (1,338.88+545.56) 1,884.44
Factory overheads (36.60+109.79) 146.39
Payroll expenses 2,030.83
(To allocate payroll cost to WIP and factory overheads)
Advance against salary 17.00
Payroll payable 1,527.00
Contribution to provident fund payable (Co. & employees) 250.00
Employees’ income tax payable 40.00
Bank 1,834.00

Page 5 of 6
 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Autumn 2010

(To record disbursement of payroll and payment of liabilities)

Machining Assembly Tool room Stores
Total
WIP Overheads
Rupees in '000
Cost
Payroll cost A 1,000.00 400.00 25.00 75.00 1,500.00
Overtime 75.00 40.00 5.00 15.00 135.00
1,075.00 440.00 30.00 90.00 1,635.00
Employer’s contribution to PF (A*0.833) 83.33 33.34 2.09 6.25 125.00
Provision for year-end bonus (A/12) 83.33 33.34 2.08 6.25 125.00
Provision for paid vacation (A*35/360) 97.22 38.89 2.43 7.29 145.83
1,338.88 545.56 36.60 109.79 2,030.83

Deductions from employees:

Employee income tax 25.00 15.00 - - 40.00
Employees’ contribution to PF (A*0.833) 83.33 33.33 2.08 6.25 125.00
Salary advance recoveries 28.00
108.33 48.33 2.08 6.25 193.00

(THE END)

Page 6 of 6