MEPL CLASSES

INTERMEDIATE
COST & MANAGEMENT ACCOUNTING
WEBSITE- WWW.MEPLCLASSES.COM
Mail ID – [email protected]

Main Centre – 59 Jatindra Mohan Avenue Shobhabazar Kolkata-700005

Answers are to be given only in English except in the case of the candidates who have opted
for Hindi medium. If a candidate has not opted for Hindi medium his/ her answer in Hindi
will not be valued.

Attempt any five questions from the six questions.

Working notes should form part of the answer.

Time – 1.5 Hours Marks - 50

QUESTION 1 ( 10 Marks)

The Latest Enterprises Ltd has three production departments A, B and C two service
departments D and E. The following figures are extracted from the records of the Company.

Amount (₹)

Rent and Rates 5,000

General Lighting 600

Indirect Wages 1,500

Power 1,500

Depreciation on Machinery 10,000

Sundries 10,000
The following further details are available:

A B C D E

Floor Space (Sq. Mts) 2,000 2,500 3,000 2,000 500

Light Points 10 15 20 10 5

Direct Wages (₹) 3,000 2,000 3,000 1,500 500

H.P. of machines 60 30 50 10 -

Working hours 6,226 4,028 4,066 - -

Value of Material (₹) 60,000 80,000 1,00,000 - -

Value of Assets (₹) 1,20,000 1,60,000 2,00,000 10,000 10,000

The expenses of D and E are allocated as follows:

A B C D E

D 20% 30% 40% - 10%

E 40% 20% 30% 10% -

What is the factory cost of an article if its raw material cost is ₹ 50, labour cost ₹ 30 and it
passes through Departments A, B and C, for 4, 5 and 3 hours respectively.
Solution:

Statement showing apportionment of overheads to departments

Production Service
Department Department
Particulars Basis Total
A B C D E
₹
₹ ₹ ₹ ₹ ₹

Wages Actuals 2,000 - - - 1,500 500

Rent and Rates Floor Space

5,000 1,000 1,250 1,500 1,000 250
(4:5:6:4:1)

General Light Points

Lighting 600 100 150 200 100 50
(2:3:4:2:1)

Indirect Wages Direct Wages

1,500 450 300 450 225 75
(6:4:6:3:1)

Power H.P. (6:3:5:1) 1,500 600 300 500 100 -

Depreciation Value of
on Assets
10,000 2,400 3,200 4,000 200 200
(12:16:20:1:1
Machinery )

Sundries Direct Wages

10,000 3,000 2,000 3,000 1,500 500
(6:4:6:3:1)

Total 30,600 7,550 7,200 9,650 4,625 1,575

Repeated Distribution Method

Production Department Service

Department
Particulars
A B C D E

₹ ₹ ₹ ₹ ₹

Total Overhead 7,550 7,200 9,650 4,625 1,575

(As per primary distribution)

Cost of Service Department D 925 1388 1,850 (4,625) 462

(2:3:4:1)

Cost of Service Department E 815 407 611 204 (2,037)

(4:2:3:1)

Cost of Service Department D 41 61 82 (204) 20

(2:3:4:1)

Cost of Service Department E 8 4 6 2 (20)

(4:2:3:1)

Cost of Service Department D - 2 - (2) -

(2:3:4:1)

Total Overhead of Production 9,339 9,062 12,199 - -

Department

Working Hours 6,226 4,028 4,066 - -

Overhead Recovery Rate per hour 1.50 2.25 3.00 - -

Computation of Factory Cost of the Article

Particulars Amount (₹)

Material 50.00

Labour 30.00

Prime Cost 80.00

Add: Overhead (Working hours x Rate per hour)

 Department A = 4 hours × ₹ 1.50 6.00

Department B = 5 hours × ₹ 2.25 11.25

Department C = 3 hours × ₹ 3 9.00

Factory Cost 106.25

Simultaneous Equation Method

Let total cost of Service Department D be ‘d’

and total cost of Service Department E be ‘e’

10
or, d = 4,625 + 𝑒
100

𝑜𝑟, 100 𝑑 = 4,62,500 + 10 𝑒

𝑜𝑟, 100 𝑑 – 10 𝑒 = 4,62,500………………………equation (1)

10
𝑎𝑛𝑑 𝑒 = 1,575 + 𝑑
100

𝑜𝑟, 100 𝑒 = 1,57,500 + 10 𝑑

𝑜𝑟, 10 𝑒 – 𝑑 = 15,750……………………………equation (2)

Adding equation (1) and (2)

𝑜𝑟, 100 𝑑 – 10 𝑒 + 10 𝑒 – 𝑑 = 4,62,500 + 15,750

𝑜𝑟, 99 𝑑 = 4,78,250

4,78,250
𝑜𝑟, 𝑑 = = 4,831
99

Now, putting d = 4,831 in equation (2)

𝑜𝑟, 10 𝑒 – 4,831 = 15,750

20,581
𝑜𝑟, 𝑒 = = 2,058
10

Overhead Cost of Service Department D = ₹ 4,831

and Overhead Cost of Service Department E = ₹ 2,058

 Production Department Service
Department
Particulars
A B C D E

₹ ₹ ₹ ₹ ₹

Total Overhead 7,550 7,200 9,650 4,625 1,575

(As per primary distribution)

Cost of D ₹ 4,831 is distributed 966 1,450 1,932 (4,831) 483

(2:3:4:1)

Cost of E ₹ 2,058 is distributed 823 412 617 - (2,058)

(4:2:3:1)

Total Overhead of Production 9,339 9,062 12,199 - -

Department

Working Hours 6,226 4,028 4,066 - -

Overhead Recovery Rate per hour 1.50 2.25 3.00 - -

QUESTION 2 (10 Marks)
From the details given below, CALCULATE:
(i) Re-ordering level
(ii) Maximum level
(iii) Minimum level
(iv) Danger level.
Re-ordering quantity is to be calculated on the basis of following information: Cost of placing
a purchase order is ₹ 20
Number of units to be purchased during the year is 5,000 Purchase price per unit inclusive of
transportation cost is ₹ 50 Annual cost of storage per units is ₹ 5.
Details of lead time :
Average- 10 days, Maximum- 15 days, Minimum- 5 days.
For emergency purchases- 4 days.
Rate of consumption : Average: 15 units per day,
Maximum: 20 units per day.
Solution
Basic Data:

A (Number of units to be purchased annually) = 5,000 units

O (Ordering cost per order) = ₹ 20
C (Annual cost of storage per unit) = ₹5
Purchase price per unit inclusive of transportation cost = ₹ 50.
Computations:
(i) Re-ordering level = Maximum usage per period × Maximum lead time (ROL)
= 20 units per day × 15 days = 300 units
(ii) Maximum level = ROL + ROQ – [Min. rate of consumption × Min.
(Refer to working notes1 and 2) lead time]
= 300 units + 200 units – [10 units per day × 5 days]
= 450 units
(iii) Minimum level = ROL – Average rate of consumption × Average re- order-period
= 300 units – (15 units per day × 10 days)
=150 units

(iv) Danger level = Average consumption × Lead time for emergency purchases
= 15 units per day × 4 days = 60 units

Working Notes:
Minimum rate of consumption per day
𝐴𝑣𝑔. 𝑅𝑎𝑡𝑒 𝑜𝑓 𝐶𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛
𝑀𝑖𝑛 𝑅𝑎𝑡𝑒 𝑜𝑓 𝐶𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛 + 𝑀𝑎𝑥 𝑅𝑎𝑡𝑒 𝑜𝑓 𝐶𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛
=
2

𝑋 𝑢𝑛𝑖𝑡𝑠 / 𝑑𝑎𝑦+ 20 𝑢𝑛𝑖𝑡𝑠 𝑝𝑒𝑟 𝑑𝑎𝑦

15 units per day = = 2

Or X = 10 units per day

Re-order Quantity (ROQ) or Economic Order Quantity (EOQ) =

2 × 5000 × 20
𝐸𝑂𝑄 = √ = 200 𝑢𝑛𝑖𝑡𝑠
5
QUESTION 3 (10 Marks)
Calculate the total earnings and effective rate of earnings per hour of three operators: A, B and
C under Rowan System and Halsey System from the following particulars:

The standard time fixed for producing 1 dozen articles is 50 hours. The rate of wages is ₹ 1 per
hour. The actual

time taken by three are as follows:

A 45 hours

B 40 hours

C 30 hours
Solution:

Particulars A B C

Time Allowed (TA) 50 hours 50 hours 50 hours

Time Taken (T) 45 hours 40 hours 30 hours

Time Saved (TS) 5 hours 10 hours 20 hours

Rate per hour (R) ₹1 ₹1 ₹1

Earnings under Rowan Plan = T × R + TS × T × R

TA
45 × 1 + 5 × 45 × 1 40 × 1 + 10 × 40 × 1 30 × 1 + 20 × 30 × 1
50 50 50
Earnings

= 45 + 4.50 = ₹ 49.50 = 40 + 8 = ₹ 48 = 30 + 12 = ₹ 42
Effective Rate = ₹ 48 = ₹ = ₹ 42 = ₹
= ₹ 49.50 = ₹ 1.10
(i.e., Earnings per 1.20 1.40
45 hours
hour) 40 hours 30 hours
Earnings under Halsey Plan = T × R + 50 × TS × R
100
45 × 1 + 50 × 5 × 1 40 × 1 + 50 × 10 × 1 30 × 1 + 50 × 20 × 1
Earnings 100 100 100
= 45 + 2.50 = ₹ 47.50 = 40 + 5 = ₹ 45 = 30 + 10 = ₹ 40
Effective Rate = ₹ 45 = ₹ = ₹ 40 = ₹
= ₹ 47.50 = ₹ 1.06
(i.e., Earnings per 1.125 1.33
45 hours
hour) 40 hours 30 hours
QUESTION 4 A (6 Marks)

Gross pay `10,30,000 (including cost of idle time hours paid to employee ` 25,000);
Accommodation provided to employee free of cost [this accommodation is owned by
employer, depreciation of accommodation ` 1,00,000, maintenance charges of the
accommodation ` 90,000, municipal tax paid for this accommodation ` 3,000], Employer’s
Contribution to P.F. ` 1,00,000 (including a penalty of ` 2,000 for violation of P.F. rules),
Employee’s Contribution to P.F. ` 75,000. Compute the Employee Cost.

Solution:

Computation of Employee Cost

Particulars Amount (`)

Gross Pay (net of cost of idle time) [10,30,000 – 25,000] 10,05,000

Add: Cost of Accommodation provided by employer

= Depreciation + Maintenance Charges + Municipal Tax
= 1,00,000 + 90,000 + 3,000
Add: Employer’s contribution to PF excluding penalty paid to PF 1,93,000
authority 98,000
Employee Cost 12,96,000

Note:
1. Assumed that the entire accommodation is exclusively used by the employee.
Hence, cost of accommodation provided includes all related expenses / costs,
since these are identifiable / traceable to the cost centre.
2. Cost of idle time hours is assumed as abnormal. Since, it is already included in
the gross pay, hence, excluded.
3. Penalty paid to PF authorities is not a normal cost. Since, it is included in the
amount of contribution, it is excluded.
QUESTION 4 B (4 Marks)

Explain briefly Principles of Apportionment of Overhead Cost

Solution:

Principles of Apportionment of Overhead Cost

a. Services Rendered

A production department which receives maximum services from service departments should
be charged with the largest share of the overheads. Accordingly, the overheads of service
departments are charged to the production departments.

b. Ability to Pay

This method suggests that a large share of service department’s overhead costs should be
assigned to those production departments whose product contributes the most to the income of
the business firm. However, the practical difficulty in this method is that, it is difficult to decide
the most paying department and hence difficult to operate.

c. Survey or Analysis Method

This method is used where a suitable base is difficult to find or it would be too costly to select
a method which is considered suitable. For example, the postage cost could be apportioned on
a survey of postage used during the year.

d. Efficiency Method

The apportionment of overhead is made on the basis of production targets. If the target is
exceeded, the unit cost reduces indicating a more than average efficiency. If the target is not
achieved, the unit cost goes up, disclosing thereby, the inefficiency of the department.
QUESTION 5 (10 Marks)

A factory uses 4,000 varieties of inventory. In terms of inventory holding and inventory
usage, the following information is compiled:
% value of % of inventory
No. of varieties
% inventory holding usage (in end-
of inventory
(average) product)
3,875 96.875 20 5
110 2.750 30 10
15 0.375 50 85
4,000 100.00 100 100
CLASSIFY the items of inventory as per ABC analysis with reasons.

Solution

Classification of the items of inventory as per ABC analysis

1. 15 number of varieties of inventory items should be classified as ‘A’ category items
because of the following reasons:
(i) Constitute 0.375% of total number of varieties of inventory handled by stores of
factory, which is minimum as per given classification in the table.
(ii) 50% of total use value of inventory holding (average), which is maximum, according
to the given table.
(iii) Highest in consumption, about 85% of inventory usage (in end- product).

2. 110 number of varieties of inventory items should be classified as ‘B’ category items
because of the following reasons:
(i) Constitute 2.750% of the total number of varieties of inventory items handled by
stores of factory.
(ii) Requires moderate investment of about 30% of total use value of inventory holding
(average).
(iii) Moderate in consumption, about 10% of inventory usage (in end– product).

3. 3,875 number of varieties of inventory items should be classified as ‘C’ category items
because of the following reasons:
(i) Constitute 96.875% of total varieties of inventory items handled by stores of
factory.
(ii) Requires about 20% of total use value of inventory holding (average).
(iii) Minimum inventory consumption, i.e. about 5% of inventory usage (in end-
product).
QUESTION 6 (10 Marks)
Two workmen, Jay and Viru, produce the same product using the same material. Their normal
wage rate is also the same. Jay is paid bonus according to the Rowan System, while Viru is
paid bonus according to Halsey System. The time allowed to make the product is 100 hours.
Jay takes 60 hours while Viru takes 80 hours to complete the
product. The factory overhead rate is ₹ 10 per man-hour actually worked. The factory cost for
the product for Jay is ₹ 7,280 and for Viru it is ₹ 7,600.
You are required:
A. to find the normal rate of wages;
B. to find the cost of materials;
C. to prepare a statement comparing the factory cost of the products as made by the
two men.

Solution:
Let Cost of Material be ‘M’ and Wage Rate per hour be ‘R’

Particulars Jay (Rowan Plan) Viru (Halsey Plan)

M M
Material
60 × R + 40 × 60 × R 80 × R + 50 × 20 × R
Labour (Working
100 100
Note)
= 84 R = 90 R
Prime Cost M + 84 R M + 90 R
Add: Overhead 60 × 10 = 600 80 × 10 = 800
Factory Cost 7,280 7,600
M + 84R + 600 = 7,280 M + 90R + 800 = 7,600
Equation
or, M + 84R = 6,680 or, M + 90R = 6,800

So, Equation (1) => M + 84R = 6,680

And, Equation (2) => M + 90R = 6,800
Equation (2) – Equation (1)
or, 6R = 120
or, R = 20
A. Wage Rate per hour = ₹ 20 per hour
putting R = 20 in equation (1) => M = 6,680 – 84 × 20 = 6,680 – 1,680 = 5,000
B. Material Cost = ₹ 5,000
C. Statement comparing the factory cost of the products as made by the two workmen
Particulars Jay (₹) Viru (₹)
Material 5,000 5,000
Wages 40 40
(60 × 20 + × 60 × 20) (60 × 20 + × 60 × 20)
100 100
1680 1800

Overhead 600 800

Factory Cost 7,280 7,600

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