PAPER – 3: COST AND MANAGEMENT ACCOUNTING

Question No. 1 is compulsory.

Attempt any four questions out of the remaining five questions.
In case, any candidate answers extra question(s)/ sub-question(s) over and above the
required number, then only the requisite number of questions first answered in the answer
book shall be valued and subsequent extra question(s) answered shall be ignored.
Working notes should form part of the answer
Question 1
Answer the following:
(a) XYZ Ltd. uses two types of raw materials – ‘Material A’ and ‘Material B’ in the production
process and has provided the following data for the year ended on 31 st March, 2021:
Particulars Material A Material B
(`) (`)
Opening stock as on 01.04.2020 30,000 32,000
Purchase during the year 90,000 51,000
Closing stock as on 31.03.2021 20,000 14,000
(i) You are required to calculate:
(a) The inventory turnover ratio of ‘Material A’ and ‘Material B’.
(b) The number of days for which the average inventory is held for both materials
‘A’ and ‘B’.
(ii) Based on above calculations, give your comments.
(Assume 360 days in a year.)
(b) The Accountant of KPMR Ltd. has prepared the following budget for the coming year
2022 for its two products ‘AYE’ and ‘ZYE’:
Particulars Product ‘AYE’ Product ‘ZYE’
Production and Sales (in Units) 4,000 3,000
Amount (in `) Amount (in `)
Selling Price per unit 200 180
Direct Material per unit 80 70
Direct Labour per unit 40 35
Variable Overhead per unit 20 25
Fixed Overhead per unit 10 10

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 2 INTERMEDIATE (NEW) EXAMINATION: DECEMBER, 2021

After reviewing the above budget, the management has called the marketing team for
suggesting some measures for increasing the sales. The marketing team has suggested
that by promoting the products on social media, the sales quantity of both the products
can be increased by 5%. Also, the selling price per unit will go up by 10%. But this will
result in increase in expenditure on variable overhead and fixed overhead by 20% and
5% respectively for both the products.
You are required to prepare flexible budget for both the products:
(i) Before promotion on social media,
(ii) After promotion on social media.
(c) A skilled worker is paid a guaranteed wage rate of ` 150 per hour. The standard time
allowed for a job is 10 hours. He took 8 hours to complete the job. He has been paid the
wages under Rowan Incentive Plan.
You are required to:
(i) Calculate an effective hourly rate of earnings under Rowan Incentive Plan.
(ii) Calculate the time in which he should complete the job, if the worker is placed under
Halsey Incentive Scheme (50%) and he wants to maintain the same effective hourly
rate of earnings.
(d) 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 (4 x 5 = 20 Marks)
Answer
(a) (i) Calculation of Inventory Turnover ratios and number of days:
Material A (`) Material B (`)
Opening stock 30,000 32,000
Add: Purchases 90,000 51,000
1,20,000 83,000
Less: Closing stock 20,000 14,000

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 3

Materials consumed 1,00,000 69,000

Average inventory: (Opening Stock + Closing 25,000 23,000
Stock)  2
(a) Inventory Turnover ratio: (Consumption 4 times 3 times
 Average inventory)
(b) Number of days for which the average 90 days 120 days
inventory held (Number of Days in a
year/IT ratio)
(ii) Comments: Material A is moving faster than Material B. Or Material A has a less
holding period.
(b) (i) Flexible Budget (before promotion)
Particulars Product ‘AYE’ Product ‘ZYE’ Total
Production & Sales 4,000 3,000
(units)
Amount (`) Amount (`) Amount (`)
A. Sales Value 8,00,000 5,40,000 13,40,000
(` 200×4,000) (` 180×3,000)
B. Direct Materials 3,20,000 2,10,000 5,30,000
(` 80 × 4,000) (`70 × 3,000)
C. Direct labour 1,60,000 1,05,000 2,65,000
(` 40 × 4,000) (` 35 × 3,000)
D. Variable Overheads 80,000 75,000 1,55,000
(` 20 × 4,000) (` 25 × 3,000)
E. Total Variable Cost 5,60,000 3,90,000 9,50,000
(B+C+D)
F. Contribution (A-E) 2,40,000 1,50,000 3,90,000
G. Fixed Overhead 40,000 30,000 70,000
(`10 × 4,000) (`10 × 3,000)
H. Profit (F-G) 2,00,000 1,20,000 3,20,000
Profit per unit 50 40
(ii) Flexible Budget (after promotion)
Particulars Product ‘AYE’ Product ‘ZYE’ Total
Production & Sales 4,200 3,150
(units) (4,000×105%) (3,000×105%)

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 4 INTERMEDIATE (NEW) EXAMINATION: DECEMBER, 2021

Amount (`) Amount (`) Amount (`)

A. Sales Value 9,24,000 6,23,700 15,47,700
(` 220 × 4,200) (` 198 × 3,150)
B. Direct Materials 3,36,000 2,20,500 5,56,500
(` 80 × 4,200) (` 70 × 3,150)
C. Direct labour 1,68,000 1,10,250 2,78,250
(` 40 × 4,200) (` 35 × 3,150)
D. Variable Overheads 1,00,800 94,500 1,95,300
(` 24 × 4,200) (` 30 × 3,150)
E. Total Variable Cost 6,04,800 4,25,250 10,30,050
(B+C+D)
F. Contribution (A-E) 3,19,200 1,98,450 5,17,650
G. Fixed Overhead 42,000 31,500 73,500
(` 40,000 × (` 30,000 ×
105%) 105%)
H. Profit (F-G) 2,77,200 1,66,950 4,44,150
Profit per unit 66 53
(c) (i) Calculation of Effective hourly rate of earnings under Rowan Incentive Plan:
Standard time allowed = 10 hours
Time taken = 8 hours; Time saved = 2 hours
Particulars Amount
(`)
A Basic guaranteed wages (`150×8 hours) 1,200
B 2 240
Add: Bonus for time saved ( × 8 × ` 150)
10
C Total earnings (A+B) 1,440
D Hours worked 8 hours
E Effective hourly rate (C÷D) 180
(ii) Let the time taken to complete the job is “T” and the time saved is 10-T
Effective hourly rate under the Halsey Incentive scheme
(Rate × Hours Worked) + (Rate × 50% of Time Saved)
= = ` 180
Hours Worked

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 5

(`150 × T) + `150 × 50% (10 - T)

= ` 180
T
150T + 750 -75T = 180T
180T-75T = 750
750
T= = 7.14 hours
105
(d) (i) Process - I Account
Particulars Units (`) Particulars Units (`)
To Materials 10,000 80,000 By Normal loss 500 2,500
(5%of 10,000)
To Wages - 60,000 By Process-II A/c 9,650 1,93,000
(`20*×9,650units
)
To Manufacturing OH 52,500
To Abnormal Gain A/c 150 3,000
(`20*×150units)
10,150 1,95,500 10,150 1,95,500
(80,000 + 60,000 + 52,500) - 2,500
* = ` 20
10,000 - 500
(ii) Abnormal Gain - Account
Particulars Units (`) Particulars Units (`)
To Normal loss A/c 150 750 By Process-I A/c 150 3,000
To Costing P&L A/c - 2,250
150 3,000 150 3,000

Question 2
(a) G Ltd. manufactures leather bags for office and school purposes.
The following information is related with the production of leather bags for the month of
September, 2021.
(1) Leather sheets and cotton clothes are the main inputs and the estimated
requirement per bag is two metres of leather sheets and one metre of cott on cloth.
2,000 metre of leather sheets and 1,000 metre of cotton cloths are purchased at
` 3,20,000 and ` 15,000 respectively. Freight paid on purchases is ` 8,500.
(2) Stitching and finishing need 2,000 man hours at ` 80 per hour.

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 6 INTERMEDIATE (NEW) EXAMINATION: DECEMBER, 2021

(3) Other direct costs of ` 10 per labour hour is incurred.

(4) G Ltd. have 4 machines at a total cost of ` 22,00,000. Machines have a life of 10
years with a scrap value of 10% of the original cost. Depreciation is charged on a
straight-line method.
(5) The monthly cost of administration and sales office staffs are ` 45,000 and ` 72,000
respectively. G Ltd. pays ` 1,20,000 per month as rent for a 2,400 sq. feet factory
premises. The administrative and sales office occupies 240 sq. feet and 200 sq. feet
respectively of factory space.
(6) Freight paid on delivery of finished bags is ` 18,000.
(7) During the month, 35 kgs of scrap (cuttings of leather and cotton) are sold at ` 150
per kg.
(8) There are no opening and closing stocks of input materials. There is a finished
stock of 100 bags in stock at the end of the month.
You are required to prepare a cost sheet in respect of above for the month of September
2021 showing:
(i) Cost of Raw Material Consumed
(ii) Prime Cost
(iii) Works/Factory Cost
(iv) Cost of Production
(v) Cost of Goods Sold
(vi) Cost of Sales (10 Marks)
(b) AZ company has prepared its budget for the production of 2,00,000 units. The variable
cost per unit is ` 16 and fixed cost is ` 4 per unit. The company fixes its selling price to
fetch a profit of 20% on total cost.
You are required to calculate:
(i) Present break-even sales (in ` and in quantity).
(ii) Present profit-volume ratio.
(iii) Revised break-even sales in ` and the revised profit-volume ratio, if it reduces its
selling price by 10%.
(iv) What would be revised sales- in quantity and the amount, if a company desires a
profit increase of 20% more than the budgeted profit and selling price is reduced by
10% as above in point (iii). (10 Marks)

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 7

Answer
(a) No. of bags manufactured = 1,000 units
Cost sheet for the month of September 2021
Particulars Total Cost Cost per unit
(`) (`)
1. Direct materials consumed:
- Leather sheets 3,20,000 320.00
- Cotton cloths 15,000 15.00
Add: Freight paid on purchase 8,500 8.50
(i) Cost of material consumed 3,43,500 343.50
2. Direct wages (`80 × 2,000 hours) 1,60,000 160.00
3. Direct expenses (`10 × 2,000 hours) 20,000 20.00
4. (ii) Prime Cost 5,23,500 523.50
5. Factory Overheads: Depreciation on machines 16,500 16.50
{(` 22,00,000 × 90%) ÷ 120 months}
Apportioned cost of factory rent 98,000 98.00
6. (iii) Works/ Factory Cost 6,38,000 638.00
7. Less: Realisable value of cuttings (`150×35 (5,250) (5.25)
kg.)
8. (iv) Cost of Production 6,32,750 632.75
9. Add: Opening stock of bags 0
10. Less: Closing stock of bags (100 bags × (63,275)
`632.75)
11. (v) Cost of Goods Sold 5,69,475 632.75
12. Add: Administrative Overheads:
- Staff salary 45,000 50.00
- Apportioned rent for administrative 12,000 13.33
office
13. Add: Selling and Distribution Overheads
- Staff salary 72,000 80.00
- Apportioned rent for sales office 10,000 11.11
- Freight paid on delivery of bags 18,000 20.00
14. (vi) Cost of Sales 7,26,475 807.19

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 8 INTERMEDIATE (NEW) EXAMINATION: DECEMBER, 2021

Apportionment of Factory rent:

To factory building {(` 1,20,000 ÷ 2400 sq. feet) × 1,960 sq. feet} = ` 98,000
To administrative office {(` 1,20,000 ÷ 2400 sq. feet) × 240 sq. feet} = ` 12,000
To sale office {(` 1,20,000 ÷ 2400 sq. feet) × 200 sq. feet} = ` 10,000
(b) Variable Cost per Unit=`16
Fixed Cost per Unit =` 4, Total Fixed Cost= 2,00,000 units x ` 4 = `8,00,000
Total Cost per Unit =`20
Selling Price per Unit=Total Cost+ Profit =` 20+` 4 =` 24
Contribution per Unit=` 24-`16=` 8
Fixed cost ` 8,00,000
(i) Present Break-even Sales (Quantity) = =
Contribution margin per unit `8
= 1,00,000 units
Present Break-even Sales (`) = 1,00,000 units  ` 24 = ` 24,00,000
8
(ii) Present P/V Ratio =  100 = 33.33%
24
(iii) Revised Selling Price per Unit = ` 24 – 10% of ` 24 = ` 21.60
Revised Contribution per Unit=` 21.60-` 16 = ` 5.60
5.60
Revised P/V Ratio =  100 = 25.926%
21.60
Fixed cost 8,00,000
Revised Break-even point (`) = = = ` 30,85,705
P/V ratio 25.926%

Or

Fixed cost 8,00,000

Revised Break-even point (units) = = = 1,42,857
Contribution margin per unit 5.60
units
Revised Break-even point (`) = 1,42,857 units x ` 21.60 = ` 30,85,711
(iv) Present profit =` 8,00,000
Desired Profit = 120% of ` 8,00,000 =` 9,60,000
Sales to earn a profit of ` 9,60,000
Total contribution required = 8.00.000 + 9,60,000 = ` 17,60,000

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 9

Fixed cost + Desired profit 8,00,000 + 9,60,000

= = 3,14,286 units
Contribution per unit 5.60

Revised sales (in `) = 3,14,286 units x ` 21.60 = ` 67,88,578

Question 3
(a) 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. Co mpany
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:
Particulars
Driver’s salary ` 20,000 per driver per month
Lady attendant’s salary (mandatorily required for ` 10,000 per attendant per month
each mini bus)
Cleaner’s salary (One cleaner for 2 mini buses) ` 15,000 per cleaner per month
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 per month
Garage rent paid ` 24,000 per month
Repair & maintenance including engine oil and ` 2,856 per mini bus
lubricants (for every 5,760 kms)
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 ` 3,00,000
life
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 up-to 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,

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 10 INTERMEDIATE (NEW) EXAMINATION: DECEMBER, 2021

(ii) Calculate the average cost per employee per month in respect of:
(a) Employees coming from a distance upto 15 kms. from the office.
(b) Employees coming from a distance beyond 15 kms. from the office. (10 Marks)
(b) A Drug Store is presently selling three types of drugs namely ‘Drug A’, ‘Drug B’ and ‘Drug
C’. Due to some constraints, it has decided to go for only one product line of drugs. It has
provided the following data for year 2020-21 for each product line:
Drugs Types
A B C
Revenues (in `) 74,50,000 1,11,75,000 1,86,25,000
Cost of goods sold (in `) 41,44,500 68,16,750 1,20,63,750
Number of purchase orders placed (in nos.) 560 810 630
Number of deliveries received 950 1,000 850
Hours of shelf-stocking time 900 1,250 2,350
Units sold (in Nos.) 1,75,200 1,50,300 1,44,500
Following additional information is also provided:
Activity Description of activity Total Cost Cost-allocation base
(`)
Drug Licence fee Drug Licence fee 5,00,000 To be distributed in
ratio 2:3:5 between A,
B and C
Ordering Placing of orders for 8,30,000 2,000 purchase orders
purchases
Delivery Physical delivery and 18,20,000 2,800 deliveries
receipt of foods
Shelf stocking Stocking of goods 32,40,000 4,500 hours of shelf-
stocking time
Customer Support Assistance provided 28,20,000 4,70,000 units sold
to customers
You are required to:
(i) Calculate the operating income and operating income as a percentage (%) of
revenue of each product line if:
(a) All the support costs (Other than cost of goods sold) are allocated in the ratio
of cost of goods sold.

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 11

(b) All the support costs (Other than cost of goods sold) are allocated using
activity-based costing system.
(ii) Give your opinion about choosing the product line on the basis of operat ing income
as a percentage (%) of revenue of each product line under both the situations as
above. (10 Marks)
Answer
(a) (i) Statement of Expenses of operating a mini bus in a year
Particulars Rate Per Bus per
(`) annum (`)
(A) Standing Charges:
Driver’s salary 20,000 p.m 2,40,000
Lady attendant’s salary 10,000 p.m 1,20,000
Average Cleaner’s salary (50%) 15,000 p.m 90,000
Insurance charge 30,000 p.a. 30,000
License fee, taxes etc. 5,080 p.m. 60,960
Average Garage Rent 24,000 p.m 36,000
Depreciation {(15,00,000 – 3,00,000) ÷ 8} 1,50,000 p.a. 1,50,000
(B) Maintenance Charges:
Repairs & maintenance including engine 28,560 p.a.
oil and lubricants (Working Note 1)
(C) Operating Charges:
Diesel (Working Note 2) 5,76,000
Total Cost (A + B + C) 13,31,520
Cost per month 1,10,960
(ii) Average cost per employee per month:
A. Employee coming from distance of upto 15 km
Total cost per month 1,10,960
= = = ` 1,541.11
Total no.of equivalent employee 72*

B. Employee coming from a distance beyond 15 km

= 1541.11 × 2 = ` 3,082.22
* Considering half fare employees as a base
Full fare employees (12 × 2) 24 employees

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 12 INTERMEDIATE (NEW) EXAMINATION: DECEMBER, 2021

Add: Half fare employees (Working Note 3) 12 employees

Total Equivalent number of employees per month 36 employees
Total Equivalent number of employees per month (morning 72 employees
+ afternoon shift of company)
Working Notes:
1. Calculation of Repairs and maintenance cost of a bus :
Distance travelled in a year:
(4 trip × 2 shifts × 30 km. × 20 days × 12 months)
Distance travelled p.a.: 57,600 km.
Repairs and maintenance cost per Bus per annum:
57,600 km.
= × ` 2,856 per bus
5,760 km
= ` 28,560 per annum
2. Calculation of diesel cost per bus per annum:
Distance travelled in a year = 57,600 km
Diesel cost per Bus per annum:
57,600 km.
= ×` 80
8 Km
= 5,76,000
3. Calculation of equivalent number of employees per bus:
Seating capacity of a bus 30 employees
Occupancy (80% of capacity) 24 employees
Half fare employees (50% of 24 employees) 12 employees
Full fare employees (50% of 24 employees) 12 employee
[Note: Total Equivalent number of employees per month (morning + afternoon shift of
company can also be calculated considering full fare employees as a base. In that case
the number will be 36. Then fare for employees coming from distance beyond 15km will
1,10,960
be = ` 3,082.22 and employees coming from distance upto 15 km will be
36
3,082.22 / 2 = ` 1,541.11]

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(b) (i) (a) Statement of Operating income and Operating income as a percentage
of revenues for each product line
(When support costs are allocated to product lines on the basis of cost of
goods sold of each product)
Drug A (`) Drug B (`) Drug C (`) Total (`)
Revenues: (A) 74,50,000 1,11,75,000 1,86,25,000 3,72,50,000
Cost of Goods sold 41,44,500 68,16,750 1,20,63,750 2,30,25,000
(COGS): (B)
Support cost (40% of 16,57,800 27,26,700 48,25,500 92,10,000
COGS): (C)
(Refer working notes)
Total cost: (D) = {(B) + 58,02,300 95,43,450 1,68,89,250 3,22,35,000
(C)}
Operating income: E = 16,47,700 16,31,550 17,35,750 50,15,000
{(A)-(D)}
Operating income as a 22.12% 14.60% 9.32% 13.46%
% of revenues: (E/A) ×
100)

Working notes:
1. Total support cost:
(`)
Drug Licence Fee 5,00,000
Ordering 8,30,000
Delivery 18,20,000
Shelf stocking 32,40,000
Customer support 28,20,000
Total support cost 92,10,000
2. Percentage of support cost to cost of goods sold (COGS):
Total support cost
= 100
Total cost of goods sold
` 92,10,000
= ` 2,30,25,000 ×100 = 40%

3. Cost for each activity cost driver:

Activity Total Cost allocation base Cost driver rate
cost (`)
(1) (2) (3) (4) = [(2) ÷ (3)]
Ordering 8,30,000 2,000 purchase orders ` 415 per purchase order

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 14 INTERMEDIATE (NEW) EXAMINATION: DECEMBER, 2021

Delivery 18,20,000 2,800 deliveries ` 650 per delivery

Shelf-stocking 32,40,000 4,500 hours ` 720 per stocking hour
Customer support 28,20,000 4,70,000 units sold ` 6 per unit sold

(b) Statement of Operating income and Operating income as a percentage of

revenues for each product line
(When support costs are allocated to product lines using an activity-based
costing system)
Drug A (`) Drug B (`) Drug C (`) Total (`)
Revenues: (A) 74,50,000 1,11,75,000 1,86,25,000 3,72,50,000
Cost & Goods sold 41,44,500 68,16,750 1,20,63,750 2,30,25,000
Drug Licence Fee 1,00,000 1,50,000 2,50,000 5,00,000
Ordering cost* 2,32,400 3,36,150 2,61,450 8,30,000
(560:810:630)
Delivery cost* 6,17,500 6,50,000 5,52,500 18,20,000
(950:1000:850)
Shelf stocking cost* 6,48,000 9,00,000 16,92,000 32,40,000
(900:1250:2350)
Customer Support cost* 10,51,200 9,01,800 8,67,000 28,20,000
(175200:150300:144500)
Total cost: (B) 67,93,600 97,54,700 1,56,86,700 3,22,35,000
Operating income C: {(A) - 6,56,400 14,20,300 29,38,300 50,15,000
(B)}
Operating income as a % of 8.81% 12.71% 15.78% 13.46%
revenues
* Refer to working note 3
(ii) Comparison on the basis of operating income as per the percentage (%) of
revenue:
(a) When support costs are allocated to product lines on the basis of cost of goods
sold of each product
Drug A (`) Drug B (`) Drug C (`) Total (`)
Operating income as 22.12% 14.60% 9.32% 13.46%
a % of revenues
On comparing the operating income as a % of revenue of each product , Drug
A is the most profitable product line, though its revenue is least but with
highest units sold.

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(b) When support costs are allocated to product lines using an activity -based
costing system
Drug A (`) Drug B (`) Drug C (`) Total (`)
Operating income as 8.81% 12.71% 15.78% 13.46%
a % of revenues
On comparing the operating income as a % of revenue of each product, Drug
C is the most profitable product line, though its unit sold is least but with
highest revenue.
Question 4
(a) A construction company has obtained a contract of ` 30 lakhs contract price.
The following details are available in respect of this contract for the year ended
March 31, 2021:
Particulars (`)
Materials purchased 2,00,000
Materials issued from stores 8,00,000
Wages paid 1,50,000
Plant Supervisor Salary 2,40,000
Drawing and maps 50,000
Sundry expenses 30,000
Electricity charges 40,000
Plant hire expenses paid 75,000
Sub-contract cost 40,000
Materials returned to stores 35,000
Materials returned to suppliers 50,000
The following balances related to the contract for the year ended on March 31, 2020 and
March 31, 2021 are available:
As on 31 st March, 2020 As on 31 st March, 2021
(`) (`)
Work certified 2,50,000 70% of Contract Price
Work uncertified 10,000 ?
Materials at site 35,000 25,000
Wages outstanding 15,000 22,000
Plant hire charges outstanding 20,000 15,000

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 16 INTERMEDIATE (NEW) EXAMINATION: DECEMBER, 2021

Further informations are as under:

1. An additional plant was used for 270 days costing ` 5,00,000 with a residual value
of ` 20,000 having life of 4 years.
2. During the year, material costing ` 40,000 was sold for ` 20,000.
3. Plant supervisor has devoted 1/3 rd of his time to this contract.
4. As on 31.03-2021, 80% of the contract was completed.
You are required to prepare Contract Account and show the notional profit or loss as on
31st March, 2021 (Assume 360 days in a year). (10 Marks)
(b) R Ltd. showed a Net Profit of ` 3,60,740 as per their cost accounts for the year ended
31st March, 2021.
The following information was revealed as a result of scrutiny of the figures from the both
sets of accounts:
Sr. No. Particulars (`)
i. Over recovery of selling overheads in cost accounts 10,250
ii. Over valuation of closing stock in cost accounts 7,300
iii. Rent received credited in financial accounts 5,450
iv. Bad debts provided in financial accounts 3,250
v. Income tax provided in financial accounts 15,900
vi. Loss on sale of capital asset debited in financial accounts 5,800
vii. Under recovery of administration overheads in cost accounts 3,600

Required:
Prepare a reconciliation statement showing the profit as per financial records. (5 Marks)
(c) What is Bill of Material? Describe the uses of Bill of Material in following departments:
(i) Purchases Department
(ii) Production Department
(iii) Stores Department
(iv) Cost/Accounting Department (5 Marks)

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 17

Answer
(a) Contract A/c
Dr. Cr.
Particulars Amount Particulars Amount
(`) (`)
To Opening Work in progress By Material returned to 35,000
store
- Work certified 2,50,000 By Material returned to 50,000
suppliers
- Work uncertified 10,000 2,60,000 By Costing P&L (Loss 20,000
on sale of material)
To Material at site 35,000 By Material Sold 20,000
To Material purchased 2,00,000 By Material at site 25,000
To Stores 8,00,000 By Works cost (Bal. fig.) 17,02,000
To Wages 1,50,000
Add: Closing O/s wages 22,000
Less: Opening O/s wages (15,000) 1,57,000
To Plant supervisor salary 80,000
(2,40,000 × 1/3)
To Drawing and maps 50,000
To Sundry expenses 30,000
To Electricity charges 40,000
To Plant hire expenses 75,000
Add: O/s at end 15,000
Less: O/s at beginning (20,000) 70,000
To Sub-contract 40,000
To Depreciation 90,000
 5,00,000 - 20,000 270 
 ×
4 360 
18,52,000 18,52,000
To works cost 17,02,000 By work in progress:
To Costing P& L (Notional 6,10,750 Work certified 21,00,000
profit)
Work uncertified 2,12,750 23,12,750
23,12,750 23,12,750

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 18 INTERMEDIATE (NEW) EXAMINATION: DECEMBER, 2021

Working Note:
Calculation of Value of work uncertified

Cost incurred till date 17,02,000

17,02,000 21,27,500
Estimate total cost [ ]
80%
Cost of work certified till date (21,27,500 × 70%) 14,89,250
Cost of uncertified work (17,02,000 – 14,89,250) 2,12,750
(b) Statement of Reconciliation
(Reconciling the profit as per costing records with the profit as per financial records)
(`) (`)
Net Profit as per Cost Accounts 3,60,740
Add:
Over recovery of selling overheads in cost accounts 10,250
Rent received credited in financial accounts 5,450 15,700
376,440
Less:
Over valuation of closing stock in cost accounts 7,300
Bad debts provided in financial accounts 3,250
Income tax provided in financial accounts 15,900
Loss on sale of capital asset debited in financial accounts 5,800
Under recovery of administration overheads in cost accounts 3,600 35,850
Profit as per Financial Accounts 3,40,590
(c) Bill of Material: It is a detailed list specifying the standard quantities and qualities of
materials and components required for producing a product or carrying out of any job.
Uses of Bill of Material in different department:
Purchase Production Stores Cost/ Accounting
Department Department Department Department
Materials are Production is planned It is used as a It is used to estimate
procured according to the nature, reference cost and profit. Any
(purchased) on volume of the materials document while purchase, issue and
the basis of required to be used. issuing materials to usage are compared/
specifications Accordingly, material the requisitioning verified against this
mentioned in it. requisition lists are department. document.
prepared.

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 19

Question 5
(a) 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:
Particulars Amount (`)
Fixed 12,00,000
Semi-variable (60% expenses are of fixed nature and 40% are of 1,80,000
variable nature)
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 was one public holiday. The actual overheads were
as follows:
Particulars Amount (`)
Fixed 1,10,000
Semi-variable (60% expenses are of fixed nature and 40% are of 19,200
variable)
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 (10 Marks)
(b) XYZ Ltd. manufactures a single product. It recovers factory overheads at a pre -
determined rate of ` 20 per man-day.
During the year 2020-21, the total factory overheads incurred and the man-days actually
worked were ` 35.50 lakhs and 1.50 lakh days respectively. Out of the amount of ` 35.50
lakhs, ` 2.00 lakhs were in respect of wages for stick period and ` 1.00 lakh was in
respect of expenses of previous year booked in this current year. During the period,
50,000 units were sold. At the end of the period, 12,000 completed units were held in
stock but there was no opening stock of finished goods. Similarly, there was no stock of
uncompleted units at the beginning of the period but at the end of the period there were
20,000 uncompleted units which may be treated as 65% complete in all respects.

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 20 INTERMEDIATE (NEW) EXAMINATION: DECEMBER, 2021

On investigation, it was found that 40% of the unabsorbed overheads were due to factory
inefficiency and the rest were attributable to increase in the cost of indirect materials and
indirect labour. You are required to:
(i) Calculate the amount of unabsorbed overheads during the year 2020 -21.
(ii) Show the accounting treatment of unabsorbed overheads in cost accounts and pass
journal entry. (10 Marks)
Answer
(a) Working Notes
Budgeted Fixed Overheads ` 12,00,000 ` 10
Fixed Overheads = =
Budgeted Output 1,20,000 units
Fixed Overheads element in Semi-Variable Overheads i.e. 60% of ` 1,08,000
`1,80,000
Budgeted Fixed Overheads ` 1,08,000 ` 0.90
Fixed Overheads = =
Budgeted Output 1,20,000units
Standard Rate of Absorption of Fixed Overheads per unit (`10 + ` 10.90
`0.90)
Fixed Overheads Absorbed on 8,000 units @ ` 10.90 ` 87,200
Budgeted Variable Overheads ` 6,00,000
Add: Variable element in Semi-Variable Overheads 40% of ` 1,80,000 ` 72,000
Total Budgeted Variable Overheads ` 6,72,000
Budgeted Variable Overheads `5.60
Standard Variable Cost per unit = =
Budgeted Output
` 6,72,000
1,20,000 units
Standard Variable Overheads for 8,000 units @ `5.60 ` 44,800
Budgeted Annual Fixed Overheads (` 12,00,000 + 60% of ` 1,80,000) ` 13,08,000
Budgeted Fixed Overheads ` 1,03,550
Possible Fixed Overheads = ×Actual Days
Budgeted Days
 ` 1,09,000 
=  19 Days 
 20 Days 
Actual Fixed Overheads (`1,10,000 + 60% of ` 19,200) ` 1,21,520
Actual Variable Overheads (`48,000 + 40% of `19,200) ` 55,680
COMPUTATION OF VARIANCES

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 21

i. Overhead Cost Variance = Absorbed Overheads – Actual Overheads

= (` 87,200 + ` 44,800) – (` 1,21,520 + ` 55,680)
= ` 45,200 (A)
ii. Fixed Overhead Cost Variance = Absorbed Fixed Overheads – Actual Fixed
Overheads
= ` 87,200 – ` 1,21,520
= ` 34,320 (A)
iii. Variable Overhead Cost Variance = Standard Variable Overheads for Production–
Actual Variable Overheads
= ` 44,800 – ` 55,680
= ` 10,880 (A)
iv. Fixed Overhead Volume Variance = Absorbed Fixed Overheads – Budgeted Fixed
Overheads
= ` 87,200 – `1,09,000
= ` 21,800 (A)
v. Fixed Overhead Expenditure Variance = Budgeted Fixed Overheads – Actual
Fixed Overheads
= ` 10.90 × 10,000 units – ` 1,21,520
= ` 12,520 (A)
vi. Calendar Variance = Possible Fixed Overheads – Budgeted
Fixed Overheads
= ` 1,03,550 – ` 1,09,000
= ` 5,450 (A)
OR
Calendar Variance = (Actual days – Budgeted days) x Standard fixed overhead
rate per day
Standard fixed overhead rate per day = 1308000/20*12 = ` 5450
Fixed Overhead Calendar Variance = (19-20) x 5450 = 5450(A)

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 22 INTERMEDIATE (NEW) EXAMINATION: DECEMBER, 2021

(b) (i) Amount of under-absorption of overheads during the year 2020-21

(`)
Total production overheads actually incurred during the year 35,50,000
2020-21
Less: Wages paid during strike period `2,00,000
Wages of previous year booked in current ` 1,00,000 3,00,000
year
Net production overheads actually incurred: (A) 32,50,000
Production overheads absorbed by 1.50 lakh man-days @ ` 20 30,00,000
per man-day: (B)
Amount of under-absorption of production overheads: [(A)–(B)] 2,50,000
(ii) Accounting treatment of under absorption of production overheads: It is given
in the statement of the question that 62,000 units (50,000 sold + 12,000 closing
stock – 0 opening stock) were completely finished and 20,000 units were 65%
complete, 40% of the under-absorbed overheads were due to factory inefficiency
and the rest were attributable to increase in cost of indirect materials and indirect
labour.
(`)
1. (40% of `2,50,000) i.e. ` 1,00,000 of under – absorbed 1,00,000
overheads were due to factory inefficiency. This being
abnormal, should be debited to the Costing Profit and Loss
A/c
2. Balance (60% of ` 2,50,000) i.e. ` 1,50,000 of under – 1,50,000
absorbed overheads should be distributed over work-in-
progress, finished goods and cost of sales by using
supplementary rate
Total under-absorbed overheads 2,50,000

Apportionment of unabsorbed overheads of `1,50,000 over work-in-progress,

finished goods and cost of sales.
Equivalent (`)
Completed units
Work-in-progress (13,000 units × ` 2) 20000 * 65% = 13,000 26,000
(Refer to Working Note)
Finished goods (12,000 units × ` 2) 12,000 24,000
Cost of sales (50,000 units × ` 2) 50,000 1,00,000
75,000 1,50,000

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 23

Journal entry:
Work-in-progress control A/c Dr. ` 26,000
Finished goods control A/c Dr. ` 24,000
Cost of Sales A/c Dr. ` 1,00,000
Costing Profit & Loss A/c Dr. ` 1,00,000
To Overhead control A/c ` 2,50,000

Working Note:
` 1,50,000
Supplementary overhead absorption rate = = ` 2 per unit
75,000 units
Question 6
Answer any four of the following:
(a) Briefly explain the ‘techniques of costing’.
(b) Narrate the terms ‘Joint Products’ and ‘By-Products’ with an example of each term.
(c) Discuss the steps involved in setting labour time standards.
(d) What is ‘Budgetary Control System’ and discuss the components of the same.
(e) Describe the difference between ‘Cost Control’ and ‘Cost Reduction’. (4 x 5 = 20 Marks)
Answer
(a)
Techniques Description
Uniform Costing When a number of firms in an industry agree among themselves
to follow the same system of costing in detail, adopting common
terminology for various items and processes they are said to
follow a system of uniform costing.
Advantages of such a system are:
i. A comparison of the performance of each of the firms can
be made with that of another, or with the average
performance in the industry.
ii. Under such a system, it is also possible to determine the
cost of production of goods which is true for the industry as
a whole. It is found useful when tax-relief or protection is
sought from the Government.
Marginal It is defined as the ascertainment of marginal cost by
Costing differentiating between fixed and variable costs. It is used to
ascertain effect of changes in volume or type of output on profit.

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 24 INTERMEDIATE (NEW) EXAMINATION: DECEMBER, 2021

Standard It is the name given to the technique whereby standard costs are
Costing and pre-determined and subsequently compared with the recorded
Variance actual costs. It is thus a technique of cost ascertainment and cost
Analysis control. This technique may be used in conjunction with any
method of costing. However, it is especially suitable where the
manufacturing method involves production of standardised goods
of repetitive nature.
Historical It is the ascertainment of costs after they have been incurred.
Costing This type of costing has limited utility.
• Post Costing: It means ascertainment of cost after
production is completed.
• Continuous costing: Cost is ascertained as soon as the job
is completed or even when the job is in progress.
Absorption It is the practice of charging all costs, both variable and fixed to
Costing operations, processes or products. This differs from marginal
costing where fixed costs are excluded.
Direct costing Direct costing is a specialized form of cost analysis that only
uses variable costs to make decisions. It does not consider fixed
costs, which are assumed to be associated with the time periods
in which they are incurred.
(b) (i) 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”.
In other words, two or more products of equal importance, produced, simultaneously
from the same process, with each having a significant relative sale value are known
as joint products.
For 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.
(ii) 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. In short, a by-product is
a secondary or subsidiary product which emanates as a result of manufacture of the
main product.
The point at which they are separated from the main product or products is known
as split-off point. The expenses of processing are joint till the split –off point.

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 25

Examples of by-products are molasses in the manufacture of sugar, tar, ammonia

and benzole obtained on carbonisation of coal and glycerine obtained in the
manufacture of soap.
(c) Procedure of Setting Labour Time Standards
The following are the steps involved in setting labour standards:
(a) Standardisation: Products to be produced are decided based on production plan
and customer's order.
(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) Standardisation 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 which 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.
(d) Budgetary Control System: It is the system of management control and
accounting in which all the operations are forecasted and planned in advance to the
extent possible and the actual results compared with the forecasted and planned
results.
Components of Budgetary Control System: The policy of a business for a
defined period is represented by the master budget, the detailed components of
which are given in a number of individual budgets called functional budgets. These
functional budgets are broadly grouped under the following heads:
1. Physical budgets: Those budgets which contain information in quantitative
terms such as the physical units of sales, production etc. This may include
quantity of sales, quantity of production, inventories, and manpower budgets
are physical budgets.
2. Cost budgets: Budgets which provides cost information in respect of
manufacturing, administration, selling and distribution, etc. for example,
manufacturing costs, selling costs, administration cost, and research and
development cost budgets are cost budgets.

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3. Profit budgets: A budget which enables the ascertainment of profit. For

example, sales budget, profit and loss budget, etc.
4. Financial budgets: A budget which facilitates in ascertaining the financial
position of a concern, for example, cash budgets, capital expenditure budget,
budgeted balance sheet etc.
(e)
Cost Control Cost Reduction
1. Cost control aims at maintaining 1. Cost reduction is concerned with
the costs in accordance with the reducing costs. It challenges all
established standards. standards and endeavours to
improvise them continuously
2. Cost control seeks to attain lowest 2. Cost reduction recognises no condition
possible cost under existing as permanent, since a change will
conditions. result in lower cost.
3. In case of cost control, emphasis 3. In case of cost reduction, it is on
is on past and present present and future.
4. Cost control is a preventive 4. Cost reduction is a corrective function.
function It operates even when an efficient cost
control system exists.
5. Cost control ends when targets 5. Cost reduction has no visible end and
are achieved. is a continuous process.

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