Cost

Accounting
Applications

JULY 189, 2024

Balkrishna Parab, ACMA, FCS, PhD

[email protected]

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1 Cost Classification

1.1 The Woody Company manufactures slippers and sells them at Rs. 10 a pair. Variable
manufacturing cost is Rs. 4.50 a pair and allocated fixed manufacturing cost is Rs. 1.50 a pair. It
has enough idle capacity available to accept a one-time-only special order of 20,000 pairs of
slippers at Rs. 6 a pair. Woody will not incur any marketing costs as a result of the special order.
Required What would the effect on operating profit be if the special order could be accepted
without affecting normal sales? Show your calculations.

1.2 In March, Octavius Company had the following costs related to producing 5,000 units: Direct
Materials, Rs. 60000; Direct Labour, Rs. 20000, Rent Rs. 5000, and Depreciation, Rs. 4000.
Required Estimate variable cost per unit.

1.3 MC Alexander Industries makes tennis balls. The company’s only plant can produce up to
2,500,000 cans of balls per year. Current production is 2,000,000 cans. Annual manufacturing,
selling, and administrative fixed costs total Rs. 700,000. The variable cost of making and selling
each can of balls is Re. 1.00. Stockholders expect a 12 per cent annual return on the company’s
Rs. 3 million in assets.

Required
a) What is MC Alexander’s current full product cost of making and selling 2 million cans of
tennis balls? What is the current full unit product cost of each can of tennis balls?
b) Assume MC Alexander is a price-taker, and the current market price is Rs. 1.45 per can
of balls (the price at which manufacturers sell to retailers). What is the full product cost
of producing and selling 2,000,000 cans of balls? Given MC Alexander’s current costs,
will the company reach stockholders’ profit goals?
c) If MC Alexander cannot change its fixed costs, what is the target variable cost per can of
balls?
d) Suppose MC Alexander could spend an extra Rs. 100,000 on advertising to differentiate
its product so that it could be a price-setter. Assuming the original volume and costs,
plus the Rs. 100,000 of new advertising costs, what cost-plus price will MC Alexander
want to charge for a can of balls?
e) Nike, Inc. has just asked MC Alexander to supply the company with 400,000 cans of balls
at a special-order price of Rs. 1.20 per can. Nike wants MC Alexander to package the
balls under the Nike label (MC Alexander will imprint the Nike logo on each ball and
can). MC Alexander will have to spend Rs. 10,000 to change the packaging machinery.
Assuming the original volume and costs, should MC Alexander accept this special order?
(Assume MC Alexander will incur variable selling costs as well as variable manufacturing
costs related to this order.)

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2 Cost Sheet

2.1 Amboli Limited has provided the following information:

Particulars April 1, 2023 (Rs.) March 31, 2024 (Rs.)

Direct materials inventory 48,100 44,200
Work-in-process inventory 67,730 71,500
Finished goods inventory 15,600 18,200
Direct materials used during the year amount to Rs. 59,800, and the cost of goods sold for the year
was Rs. 68,900. Required Find the following:
a) Cost of direct materials purchased during the year.
b) Cost of goods manufactured during the year.
c) Total manufacturing costs incurred during the year.
2.2 Boisar Limited has provided the following information:

Particulars April 1, March 31,

2021 (Rs.) 2022 (Rs.)
Direct materials inventory 96,000 118,000
Work-in-process inventory 116,000 112,000
Finished goods inventory 97,600 90,000
Direct materials purchased during the year amount to Rs. 598,000, and the cost of goods sold for the
year was Rs. 2,172,400. Required Find the following:
a) Cost of direct materials used during the year.
b) Cost of goods manufactured during the year.
c) Total manufacturing costs incurred during the year.
2.3 Chuim Limited produces 300,000 units of carafes in a month. They provide you with the
following data.

Particulars Amount (Rs.)

Sales price per unit 25
Fixed costs (per month):
Selling, general, and administrative (SG&A) overhead 300,000
Manufacturing overhead 1,050,000
Variable costs (per unit):
Direct labour 4
Direct materials 6
Manufacturing overhead 5
SG&A 3

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Required Calculate:
a) Prime cost per unit.
b) Total cost per unit.
c) Operating profit per unit.
2.4 Dombivili Desiccators Company manufactured 30,000 units of product last month and
identified the following costs associated with the manufacturing activity:

Particulars Amount (Rs.)

Variable costs:
Direct materials used 510,000
Direct labour 1,120,000
Indirect materials and supplies 120,000
Power to run plant equipment 140,000
Fixed costs:
Supervisory salaries 465,000
Plant utilities (other than power to run plant equipment) 110,000
Depreciation on plant and equipment (straight-line, time basis) 67,500
Property taxes on building 97,500
Unit variable costs and total fixed costs are expected to remain unchanged next month. Required
Calculate the unit cost and the total cost of 25,000 units are produced next month.

3 Cost-Volume-Profit Analysis

3.1 Worli Wedding Cakes creates elaborate wedding cakes. Each cake sells for Rs. 500. The variable
cost of making the cakes is Rs. 200 and the fixed cost per month is Rs. 6,000. Required: (a)
Calculate the break-even point for a month in units; and (b) Estimate how many cakes must be
sold to earn a monthly profit of Rs. 9,000?

3.2 Mahim Marina has estimated that fixed costs per month are Rs. 240,000 and variable cost per
rupee of sales is 60 paise. Required: (a) What is the break-even point per month in sales? (b)
What level of sales is needed for a monthly profit of Rs. 60,000? (c) For the month of July, the
marina anticipates sales of Rs. 1,200,000. What is the expected level of profit?

3.3 Sion Speakers produces stereo speakers. The selling price per pair of speakers is Rs. 800. The
variable cost of production is Rs. 300 and the fixed cost per month is Rs. 50,000. For November,
the company expects to sell 120 pairs of speakers. Required: (a) Calculate expected profit; and
(b) Calculate the margin of safety in rupees.

3.4 Mazgaon Toys produces board games. The selling price per unit is Rs. 800 and the variable cost
per unit is Rs. 500. Fixed costs are Rs. 1,000,000 per year. Required: (a) Calculate the

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 contribution margin per unit; (b) Calculate the breakeven point in units; (c) Calculate the
breakeven point in rupees; and (d) Calculate the operating profit.

3.5 The Shipley Corporation produces tea kettles, which it sells for $15 each. Fixed costs are
$700,000 for up to 400,000 units of output. Variable costs are $10 per kettle. Required

a) What is the firm’s gain or loss at sales of 125,000 units?

b) What is the firm’s gain or loss at sales of 175,000 units?
c) What is the breakeven point?
3.6 The following relationships exist for Shomi Industries, a manufacturer of electronic
components. Each unit of output is sold for $45; the fixed costs are $175,000; variable costs are
$20 per unit. Required

a) What is the firm’s gain or loss at sales of 5,000 units?

b) What is the firm’s gain or loss at sales of 12,000 units?
c) What is the breakeven point?
3.7 Anantapur Aviation Accessories Company’s pro-forma profit and loss account for the year
ended March 31, 2014, is as follows:

Particulars Amount Rs.

Sales (50,000 units) 450,000
Cost of goods sold:
Direct materials 35,000
Direct labour 60,000
Variable manufacturing overhead 14,000
Fixed manufacturing overhead 5,000
Total cost of goods sold 114,000
Gross margin Rs. 336,000
Selling expenses:
Variable Rs. 45,000
Fixed 102,000
Administrative expenses:
Variable 15,000
Fixed 75,000
Total selling and administrative expenses 237,000
Operating Profit Rs. 99,000
Required Compute the number of units that must be sold if the expected profit is Rs. 1 million.
a) Compute how many units must be sold to break even.
b) Compute the increase (decrease) in profit under the following independent situations: (i) Sales
increase 25 per cent. (ii) Fixed selling and administrative expenses decrease 5 per cent. (iii)
Contribution margin decreases 20 per cent.
c) Calculate sales in units and rupees at the break-even point if fixed costs increase from Rs.
182,000 to Rs. 224,800.

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4 Operating Leverage

4.1 Aquarius Aquatic Activities Company has sales of Rs. 1,000,000. The company’s fixed costs total
Rs. 250,000, and its variable costs are 60 percent of sales. Required What is the company’s
degree of operating leverage?

4.2 Billabong Bottle Company produces and sells 500,000 bottles. The company’s fixed costs total
Rs. 1,500,000; its selling price is Rs. 20 per bottle and its variable costs are Rs. 7 per bottle.
Required What is the company’s degree of operating leverage?

4.3 Chrystelle Cutlery Company produces and sells 200,000 units. The company’s fixed costs total
Rs. 150,000; its contribution margin is Rs. 3 per unit. Required What is the company’s degree of
operating leverage?

4.4 Chinchpokli Chemicals had a 1.60 operating leverage factor when sales were Rs. 45,000. The
company’s contribution margin ratio was 20 per cent. Required What were the company’s fixed
expenses?

4.5 General Manufacturing manufactures 16 GB flash drives (jump drives). The current monthly
sales volume is 100,000 units. Price and cost data for a relevant range extending to 200,000
units per month are as follows:

Particulars Amount
Sales price per unit Rs. 25.00
Variable costs per unit:
Direct materials Rs. 8.40
Direct labour Rs. 8.00
Variable manufacturing overhead Rs. 3.70
Variable selling and administrative expenses Rs. 1.90
Monthly fixed expenses:
Fixed manufacturing overhead Rs. 121,800
Fixed selling and administrative expenses Rs. 167,100
Required
a) What is the company’s current operating leverage factor (round to two decimal places)?
b) If sales volume increases by 3%, by what percentage will operating income increase?
c) What is the firm’s current margin of safety in sales dollars? What is its margin of safety as
a percentage of sales?

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5 Profit Planning

5.1 Airoli Enterprises manufactures candy that is sold to food distributors. The company produces
at full capacity for six months each year to meet peak demand during the “candy season” from
Halloween through Valentine’s Day. During the other six months of the year, the manufacturing
facility operates at 75 per cent of capacity. The company provides the following data for the
year:

Particular Amount (Rs.)

Cases of candy produced and sold (cases) 1,800,000
Sales price per case 37.00
Variable manufacturing costs per case 20.00
Fixed manufacturing costs, per year 6,400,000
Variable selling and administrative costs per case 2.00
Fixed selling and administrative costs per year 3,500,000
Airoli Enterprises receives an offer to produce 13,000 cases of candy for a special event. This is
a one-time opportunity during a period when the company has excess capacity.

Required What is the minimum sales price company should accept for the order? Explain why.

5.2 Bhiwandi Corporation is engaged in the business of manufacturing toys. The company makes an
average operating profit of Rs. 2.50 per unit on a selling price of Rs. 14.30 by producing 60,000
units. The installed capacity of the company is 100,000 units. The company is operating in a
hyper-competitive environment and is unable to increase the selling price. The following
information about cost of sales per unit is available:

Particulars Amount (Rs.)

Direct materials per unit 3.50
Direct wages per unit 1.25
Works overhead per unit (50% fixed) 6.25
Sales Overhead per unit (25% variable) 0.80
During the next year, the company anticipates the fixed costs to increase by 10 per cent and the
rates of direct materials and wages to increase by 6 per cent and 8 per cent respectively.

Required
a) Prepare the costing profit and loss account for the company for the current year and the next
year.
b) The company has received an enquiry from a large retail store about buying 20000 units.
What minimum price do you recommend for acceptance of this offer so that the company
earns an overall operating profit of Rs. 167400?

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5.3 Cheetah Camp Cleaning Service provides pool cleaning services to residential customers. The
company has three employees, each assigned to specific customers. The company considers
each employee’s territory as a business segment. The company incurs variable costs that
include the employees’ wages, pool chemicals, and gas for the service vans. Fixed costs include
depreciation on the service vans. Following is the profit and loss account for the month of July:

Particulars Arjun Balram Chintan Total

Sales Revenue 3000 3500 2000 8500
Variable Costs 1500 2450 1200 5150
Contribution Margin 1500 1050 800 3350
Fixed Costs 3000
Operating Profit 350
The three business segments had the following numbers of customers:

Particulars Arjun Balram Chintan Total

Number of Customers 60 70 40 170
Required
a) Compute the service revenue per customer, variable cost per customer, and contribution
margin per customer for each business segment.
b) Which business segment was most profitable? List some possible reasons why this segment
was most profitable. How might the various reasons affect the company in the long term?
5.4 Carlsbad Enterprises has a capacity to produce 400,000 computer cases per year. The company
is currently producing and selling 320,000 cases per year at a selling price of $40 per case. The
cost of producing and selling one case follows:

Particulars Amount Rs.

Variable manufacturing costs 16
Fixed manufacturing costs 4
Variable selling and administrative costs 8
Fixed selling and administrative costs 2
Total costs 30
The company has received a special order for 20,000 cases at a price of $25 per case. Because
it does not have to pay a sales commission on the special order, the variable selling, and
administrative costs would be only $5 per case. The special order would have no effect on
total fixed costs. The company has rejected the offer based on the following computations:

Particulars Amount Rs.

Selling price per case 25
Variable manufacturing costs 16
Fixed manufacturing costs 4
Variable selling and administrative costs 5
Fixed selling and administrative costs 2

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 Required

a) What is the impact on profit for the year if Carlsbad accepts the special order? Show
computations.
b) Do you agree with the decision to reject the special order? Explain.
5.5 Assume that Cold Rock sells ice cream for Rs. 4.80 per gallon. The cost of each gallon follows:

Particulars Amount Rs.

Materials 1.8
Labour 0.6
Variable overhead 0.3
Fixed overhead 1.2
Total costs per gallon 3.9

One of Cold Rock’s regular customers asked the company to fill a special order of 400 gallons
at a selling price of Rs. 3.60 per gallon for a fund-raising picnic for a local charity. Cold Rock
has capacity to fill it without affecting total fixed costs for the month. Cold Rock’s general
manager was concerned about selling the ice cream below the cost of Rs. 3.90 per gallon and
has asked for your advice.
Required
a) Prepare a schedule to show the impact on Cold Rock’s profits of providing 400 gallons of
ice cream in addition to the regular production and sales of 20,000 gallons per month.
b) Based solely on the data given, what is the lowest price per gallon at which the ice cream
in the special order could be sold without reducing Cold Rock’s profits? (c) What other
factors might the general manager want to consider in setting a price for the special
order?

5.6 Ghodapdeo Company is a subsidiary of an Indian company operating in the west coast of the
USA. The company manufactures and distributes carpentry tools. Production of the tools is in
the mature portion of the product life cycle.

The company has a sales force of 20. Salespeople are paid a commission of 7 percent of sales,
plus expenses of Rs. 35 per day for days spent on the road away from home, plus Rs. 0.30 per
mile. They deliver products in addition to making the sales, and each salesperson is required to
own a truck suitable for making deliveries. For the coming quarter, Ghodapdeo estimates the
following:

Particulars Amount (Rs.)

Sales 1,300,000
Cost of goods sold 450,000

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 On average, a salesperson travels 6,000 miles per quarter and spends 38 days on the road. The
fixed marketing and administrative expenses total $400,000 per quarter. Required

a) Prepare a costing profit and loss account for the company for the next quarter.

b) Suppose that a large hardware chain, Mega Hardware, Inc., wants Ghodapdeo Company
to produce its new Super Tool line. This would require Ghodapdeo Company to sell 80
per cent of total output to the chain. The tools will be imprinted with the Super Tool
brand, requiring Ghodapdeo to purchase new equipment, use somewhat different
materials, and reconfigure the production line.

Ghodapdeo’s industrial engineers estimate that cost of goods sold for the Super Tool
line would increase by 15 per cent. No sales commission would be incurred, and Mega
Hardware would link Ghodapdeo to its ERP system. This would require an annual cost of
$100,000 on the part of Ghodapdeo.

Mega Hardware would pay shipping. As a result, the sales force would shrink by 80
percent. Should Ghodapdeo accept Mega Hardware’s offer? Support your answer with
appropriate calculations.

6 Activity-Based Costing

6.1 Andhra Supermarkets has decided to increase the size of its Vashi Store. It wants information
about the profitability of individual product lines: soft drinks, fruits and cosmetics. The
following data is provided for the year 2022.

Soft Drinks Fruits Cosmetics Total

Sales 317400 840240 483960 1,641,600
Cost of Goods Sold 240000 600000 360000 1,200,000
Overheads 360,000
Operating Profit 81,600
The operating details were as follows:

Soft Drinks Fruits Cosmetics

Cost of bottles returned 4,800 … …
Purchase Orders Placed 144 336 144
Deliveries Received 120 876 264
Hours of Shelf-Stocking Time 216 2,160 1,080
Items Sold 50,400 441,600 122,400
The company has also provided the following additional information:

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 Activity Description Cost Allocation Base
Bottle returns Return of empty bottles to store 4,800 Direct Tracing
Ordering Placing of orders for purchase 62,400 624 orders
Delivery Physical delivery 100,800 1,260 deliveries
Shelf-Stocking Stocking of merchandise 69,120 3,456 hours
Customer Aid Assistance to customers 122,880 614,400 items sold
Total Rs… 360,000
Required (a) Calculate the operating profit for each item, assuming that the overheads are
allocated on the basis of gross sales. (b) Calculate the operating profit for each item assuming
that the overheads are allocated to product lines using the activity-based costing system.

6.2 Bihar Superventures is a retail store specializing in women’s clothing. The company has three
major product lines: suits, sports clothes, and accessories. The most recent monthly profit and
loss account is as follows:

Profit and Loss Account for month ended March 31, 2024
Sales 800,000
Cost of sales 572,000
Gross profit 228,000
Operating expenses:
Commissions 48,000
Salaries 71,400
Rent 21,400
Delivery 15,200
Insurance 14,000
Miscellaneous expenses 20,800 190,800
Profit before taxes 37,200
The CEO wishes to know the profitability of each of the product lines. The management
accountant provides the following information:

• The sales mix (rupees) in March was 30 per cent suits, 50 per cent sports clothes, and 20 per
cent accessories.
• The cost of sales as a percent of sales was 80 for suits, 75 for sports clothes, and 50
accessories.
• Sales commissions are 6 per cent for all product lines.
• Each product line is the responsibility of a separate manager, and each manager has a small
staff. The salaries that are directly related to each product line are: Rs. 12,000 for suits, Rs.
8000 for sports clothes, and 5200 for accessories. The remaining salaries are common to all
three product lines.
• The space occupied by the three product lines is: 50 per cent suits, 40 per cent sports clothes,
and 10 per cent accessories.

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 • Delivery expenses pertain to the cost of operating delivery trucks. The company has six trucks:
three trucks are used by the suits line, one truck by sports clothes, and two trucks by
accessories.
• Insurance premia is paid for the entire shop.
• Miscellaneous expenses are directly traceable to product lines. The amounts are: Rs. 6000 for
suits, Rs. 8800 for sports clothes, and Rs. 6000 for accessories.
Required Prepare a profit and loss account for each of the product lines.

7 Budgeting

7.1 SALES BUDGET. Coronavirus disease 2019 (COVID-19) was first identified in December 2019 and
resulted in an ongoing pandemic. There are currently few effective treatments for coronavirus
with doctors relying on patients’ immune systems. In 2020, a UK-based bio-tech company,
Synergy, produced 12,200 A tests for £290 each and 16,400 B tests for £240 each. The firm
expects B tests sales to decrease by 10% next year. However, research into the virus is expected
increase A test sales by 6% each year in the future. Management at Synergy feels that if the
price for B tests is lowered to £230 per test, the firm will see only a 7% decline in B test sales in
2021.

Required (a) Prepare a 2021 sales budget for Synergy assuming it holds prices at 2020 levels. (b)
Prepare a 2021 sales budget assuming Synergy lowers the price of B tests to £230. (c) Should
Synergy lower the price of B tests in 2021 if its goal is to maximize sales revenue?

7.2 PRODUCTION BUDGET. Umerkhadi Utensils has the following projected unit sales for the first four
months of 2023:

Jan Feb Mar Apr

Sales (Rs. ‘000) 102 96 128 153.60
Company policy is to have an ending monthly inventory equal to 5 percent of next month’s
estimated sales; however, this criterion was not in effect at the end of 2022. Ending inventory
at that time was 7,000 units. Required Determine the company’s production requirements for
each month of the first quarter of 2023.

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7.3 Coral Seas Jewelry Company makes and sells costume jewelry. For the coming year, Coral Seas
expects sales of $15.9 million and the cost of goods sold of $8.75 million. Advertising is a key
part of Coral Seas’ business strategy, and total marketing expense for the year is budgeted at
$2.8 million. Total administrative expenses are expected to be $675,000. Coral Seas has no
interest expense. Income taxes are paid at the rate of 40 percent of operating income.

Required (a) Construct a budgeted income statement for Coral Seas Jewelry Company for the
coming year. (b) What if Coral Seas had interest payments of $500,000 during the year? What
effect would that have on operating profit? On income before taxes? On net profit?

7.4 Bhoiwada Bicycles is a fast-growing start-up firm that manufactures bicycles. The following
profit and loss account is available for July:

Particulars Amount Rs.

Revenues (200 units @ Rs. 750 per unit) 150,000
Less
Manufacturing costs
Variable costs 21,840
Depreciation (fixed) 22,950
Marketing and administrative costs
Fixed costs (cash) 56,340
Depreciation (fixed) 19,050
Total costs 120,180
Operating profits 29,820
Sales volume is expected to increase by 20 percent in August, but the sales price is expected
to fall 10 percent. Variable manufacturing costs are expected to increase by 3 percent per unit
in August. In addition to these cost changes, variable manufacturing costs also will change
with sales volume. Marketing and administrative cash costs are expected to increase by 10
percent. Bhoiwada Bicycles operates on a cash basis and maintains no inventories.
Depreciation is fixed and should remain unchanged over the next three years. Required
Prepare a budgeted profit and loss account for August.

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