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COST ACCOUNTINGSuggested Answers

Intermediate Examinations Spring 2010

Page 1 of 7

Dure nayab 3-May-10 - 12:55:54 PM

Ans.1 A B C D

------------ Units ------------

Opening stock 10,000 15,000 20,000 25,000

Production during the period A 50,000 60,000 75,000 100,000

Goods available for sale B 60,000 75,000 95,000 125,000Closing Stock C (5,000) (10,000) (15,000) (24,000)

Sale D 55,000 65,000 80,000 101,000

Cost of goods available for sale: ----------------- Rupees -----------------

Opening stock valuation at lower of cost and NRV) 70,000 110,000 180,000 300,000

Cost of production for the period E 400,000 600,000 825,000 1,200,000

Cost of goods available for sale F 470,000 710,000 1,005,000 1,500,000

Closing stock cost

A & B (W/Avg.): F / B CG {

39,167 94,667

C & D (FIFO): E / A C 165,000 288,000

Selling expenses - current year H 60,000 80,000 90,000 100,000

Sales price - per unit I 10.0 12.0 12.0 12.5

Total sales price of closing stock C I 50,000 120,000 180,000 300,000

Selling costs H / D C 1.1 (6,000) (13,538) (18,563) (26,139)

Repair cost of damaged units (900) (1,200) (2,000) (5,250)

NRV of Closing stock 43,100 105,262 159,438 268,611

Value of closing stock (At lower of cost and NRV) 39,167 94,667 159,438 268,611

Ans.2

Purchase departments variable cost: Rs. 4,224,000

Costs applicable to product CALTIN - 10% of above Rs. 422,400

Ordering costs per purchase order

Annual purchases of CALTIN (tons) [240,000 x 32.5%) Tons 78,000

Existing size of purchase order (tons) Tons 6,500

No. of orders (78,000 / 6,500) Orders 12

Ordering cost per order (422,400/12) Rs. 35,200

Carrying costs per ton (22,125 / 1.25 x 1% ) Rs. Per Ton 177

Computation of EOQ 570,5177

35,200xtons78,0002=

tons

Marks EOQ Existing

Demand of CALTIN Tons 78,000 78,000

Order quantity Tons 5,570 6,500

No. of orders 14 12

Average inventory excluding buffer stock (order quantity / 2) Tons 2,785 3,250

Buffer stock Tons 2,000 2,000

Average inventory Tons 4,785 5,250

Cost of placing orders (Rs 35,200 per order) Rupees 492,800 422,400

Carrying cost ([Avg. Inventory x Rs. 177) Rupees 846,945 929,250

Total costs Rupees 1,339,745 1,351,650

Savings on adoption of EOQ Rupees 11,905

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Page 2 of 7


Ans.3 (a) EQUIVALENT PRODUCTION UNITSQuantity Schedule (in litres)

Dept. A Dept. BWIP opening 64,500 40,000

Started in process / material added 600,000 500,000

Received from preceding department - 610,000

664,500 1,150,000

Transferred out to B (664,500-24,000)x100/105 610,000 -

Transferred to finished goods (1,150,000-50,000-61,000-6,100) - 1,032,900

WIP closing 24,000 50,000

Normal loss A (664,500-24,000)x5/105) 30,500 -

Normal loss B (10% x 610,000) - 61,000

Abnormal loss B (10% x 61,000) - 6,100

664,500 1,150,000

Equivalent production unit (in litres)

Department A Department B

Material Conversion Material Conversion

Units completed and transferred out 610,000 610,000 1,032,900 1,032,900

Opening Inventory (60% completed) (64,500) (38,700) (40,000) (24,000)

Abnormal loss (B: 6,100 x 60%) - - - 3,660

Closing inventory (A: 70%, B: 80%) 24,000 16,800 50,000 40,000

569,500 588,100 1,042,900 1,052,560

(b)COST OF ABNORMAL LOSS AND CLOSING WIPDepartment A Department B

Quantity Rate Amount Quantity Rate Amount

Cost of abnormal loss

(Department B)Units Rs. Rs. Units Rs. Rs.

From department A

(610,000 x 10% x 10%) 6,100 (W-2) 54.60 333,044

Labour (60%) 3,660 6.07 22,216

Overheads (60%) 3,660 3.54 12,956

- 368,216WIP-closing costs

From department A - - - 50,000 (W-2) 28.42 1,421,000

Material 24,000 30.00 720,000 50,000 9.29 464,500

Labour (70%, 80%) 16,800 15.00 252,000 40,000 6.07 242,800

Overheads (70%, 80%) 16,800 5.00 84,000 40,000 3.54 141,600

1,056,000 2,269,900

(c) COST OF GOODS TRANSFERRED TO FINISHED GOODSRupees

Total costs charged to department (W-1) 51,863,000

Less: WIP closing costs (Computed above) (2,269,900)Less: Cost of abnormal loss (Computed above) (368,216)

Costs transferred to finished goods 49,224,884

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Page 3 of 7


W-1: Cost charged to department:

Department A Department B

Equivalent

UnitsCost (Rs.)

Unit

cost

(Rs.)

Equivalent

UnitsCost (Rs.)

Unit

cost

(Rs.)

WIP - opening inventory 2,184,000 2,080,000

Cost from department A 29,974,000

Material 569,500 17,085,000 30.00 1,042,900 9,693,000 9.29

Labour 588,100 8,821,000 15.00 1,052,560 6,389,000 6.07

Overheads 588,100 2,940,000 5.00 1,052,560 3,727,000 3.54

Total cost to be accounted for 31,030,000 50.00 51,863,000

W-2: Allocation of cost received from department A:

QuantityAmount

(Rs.)

Unit cost

(Rs.)

Units received from A 610,000

Normal loss at 10% (61,000)

549,000 *29,974,000 54.60

Abnormal loss at 1% (6,100) (333,044) 54.60

Units after inspection 542,900 29,640,956 54.60

Addition of material COY 500,000

1,042,900 29,640,956 28.42

*Rs. 31,030,000 (Total cost) Rs. 1,056,000 (Closing WIP) = Rs. 29,974,000

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Page 4 of 7


Ans.4 Actual quantity purchased: Material X Material Y

Standard consumption quantities 50,0006 300,000 50,0003 150,000

Quantity used in excess of standard usage 0 150,000/30 5,000

(adverse quantity variance)

Ending inventory 300,00020/365 16,438 150,00020/365 8,219

Opening stock 300,00025/365 (20,548) 150,00025/365 (10,274)

Actual purchase quantity kg 295,890 kg 152,945

Actual cost of purchase:

Actual quantity purchased at standard rate 295,89050 14,794,500 152,94530 4,588,350

Price paid above / (below) the standard rate

{adverse / (favorable) price variance} 95,000 4,588,350.06 (275,301)

Actual cost of purchase Rs. 14,889,500 Rs. 4,313,049

Labour and overhead variances:

Skilled labour Unskilled labour

Labour rate variance:

Actual hours at standard rate 168,0003/7150 10,800,000 168,0004/7100 9,600,000

Rate variance 10% & 5% Adverse (1,080,000) Adverse (480,000)

Labour efficiency variance:

Standard hours for 50,000 units atstandard rate 50,0001.5150 11,250,000 50,000x2x100 10,000,000

Actual hours for 50,000 units at

standard rate 168,0003/7150 10,800,000 168,0004/7100 9,600,000

Favourable 450,000 Favourable 400,000

Overheads spending variance:

Actual hours at standard rate-skilled 168,000x3/7x100 7,200,000

Actual hours at standard rate-unskilled 168,000x4/7x80 7,680,000

Fixed overheads as budgeted 4,000,000

18,880,000

Actual variable overheads 16,680,000

Actual fixed overheads 4,000,000x1.06 4,240,000

20,920,000

Spending variance Adverse (2,040,000)

Overheads efficiency variance:

Standard hours for 50,000 units at

standard rate

Skilled 50,000*1.5*100 7,500,000

Unskilled 50,000*2*80 8,000,000

15,500,000

Actual hours for 50,000 units atstandard rate

Skilled 168,000*3/7*100 7,200,000

Unskilled 168,000*4/7*80 7,680,000

14,880,000

Favourable 620,000

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Page 5 of 7


Ans.5 AW AX AY AZ TotalSale price 150.00 180.00 140.00 175.00

Less: Variable cost

Material Q at Rs 15 30.00 37.50 22.50 26.25

Material S at Rs 20 10.00 12.00 8.00 13.00

Labour cost at Rs. 25 per hour 50.00 56.25 43.75 62.50

Overheads 37.50 45.00 43.75 56.25

127.50 150.75 118.00 158.00

Contribution margin per unit Rs 22.50 29.25 22.00 17.00

Annual demand Units 5,000 10,000 7,000 8,000

Possible production under each machine :

Processing machine:Machine hours required per unit 5.00 6.00 8.00 10.00

Average CM per hour 4.50 4.88 2.75 1.70

Production priority 2 1 3 4

No. of units that can be produced in

available hours in order of CM priority

(Restricted to annual demand) 5,000 10,000 7,000 900

Hours required Hours 25,000 60,000 56,000 9,000 150,000

Contribution margin Rs. 112,500 292,500 154,000 15,300 574,300

Production for product Z has to be restricted to 900 units due to limited number of machine hours.

Packing machine:

Machine hours required per unit 2.00 3.00 2.00 4.00

Average CM per hour 11.25 9.75 11.00 4.25

Production priority 1 3 2 4

No. of units that can be produced in

available hours in order of CM priority

(Restricted to annual demand) 5,000 10,000 7,000 8,000

Hours required Hours 10,000 30,000 14,000 32,000 86,000

Conclusion :The packing machine can meet the full demand but capacity of processing machine is limited.

Therefore, product mix of processing machine will be manufactured.

Assumption:It has been assumed that the wage rate per eight hours is divisible.

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Page 6 of 7


ns.6 (a) Opportunity cost:An opportunity cost is a cost that measures the opportunity that is lost or sacrificed when the

choice of one course of action requires that an alternative course of action be given up.

ExampleA company has an opportunity to obtain a contract for the production of Z which will require

processing on machine X which is already working at full capacity. The contract can only be

fulfilled by reducing the present output of machine X which will result in reduction of profit

contribution by Rs. 200,000.

If the company accepts the contract, it will sacrifice a profit contribution of Rs. 200,000 from

the lost output of product Z. This loss of Rs. 200,000 represents an opportunity cost of

accepting the contract.

(b) Sunk costA sunk cost is a historical or past cost that the company has already incurred. These costs

cannot be changed/recovered in any case and are ignored while making a decision.

ExampleA company mistakenly purchased a machine that does not completely suit its requirements.

The price of the machine already paid is a sunk cost and will not be considered while deciding

whether to sell the machine or use it.

(c) Relevant cost:The predicted future costs that would differ depending upon the alternative courses of action,

are called relevant costs.

ExampleA company purchased a raw material few years ago for Rs. 100,000. A customer is prepared to

purchase it for Rs. 60,000. The material is not otherwise saleable but can be sold after further

processing at a cost of Rs. 30,000.

In this case, the additional conversion cost of Rs. 30,000 is relevant cost whereas the raw

material cost of Rs. 100,000 is irrelevant.

Ans.7Direct labour

Hours (x)

Overheads

(y)(xy) (x

2)

September 2009 50 14,800 740,000 2,500

October 2009 80 17,000 1,360,000 6,400

November 2009 120 23,800 2,856,000 14,400

December 2009 40 11,900 476,000 1,600

January 2010 100 22,100 2,210,000 10,000

February 2010 60 16,150 969,000 3,600

450 105,750 8,611,000 38,500

143.1053(450)-(38,500)6

105,750x450-8,611,000x6

)()xn(

y)x)((-xy)n(unit)percost(Variable

222==

=

xb

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Page 7 of 7


6,8926

(450))143.11-(105,750

n

x)b(y)(month)percosts(Fixed ==

=

a

(THE END)

d10-spring2010

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