Answer to PTP_Intermediate_Syllabus 2008_Jun 2014_Set 3

Paper – 8: Cost & Management Accounting

Time Allowed: 3 Hours Full Marks: 100

Question No 1 is Compulsory. Answers any five Questions from the rest.

Working Notes should form part of the answer.

Question.1
(a) Match the statement in Column I with appropriate statement in Column II [1x5]
Column I Column II
(i) Contribution (A) Management by exception
(ii) Price rate (B) Job evaluation
(iii) Under Absorbed Overhead (C) Marginal costing
(iv) Variance analysis (D) Supplementary rates
(v) Point rating (E) Method of wage payment

(b) State whether the following statements are TRUE or FALSE: [1x5]

(i) In variable costing, profit fluctuates with sale.

(ii) Incentive systems benefit only workers.

(iii) Service departments usually do not render services to each other.

(iv) Idle time variance is always adverse.

(v) Fixed costs vary with volume rather than time.

(c) Fill in the blanks: [1x5]

(i) The technical term for charging of overheads to cost units is known as -----------

(ii) ---------------determines the priorities in functional budgets.

(iii) In contract costing, work in progress certified is valued at -----------while uncertified

work is valued at ------------------.

(iv) Cost sheet is a document which provides for assembly of the detailed cost of a -------
----

(v) Under -------------system, there is no need of reconciliation of cost and financial

accounts.

(d) In the following cases, one out of four answers is correct. You are required to indicate the
correct answer (= 1 mark) and give workings (=1 mark): [2x5=10]

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 Answer to PTP_Intermediate_Syllabus 2008_Jun 2014_Set 3

(i) The hospital is opened for 365 days, but bed occupancy is 25 patients per day in 120
days and 20 beds occupied in another 80 days. Extra beds occupied during the year
are 400. The patient-days of the hospital is
(A) 4,000
(B) 5,000
(C) 3,500
(D) 4,600

(ii) The cost-volume-profit relationship of a company is described by the equation y = `

8,00,000 + 0.60x, in which x represents sales revenue and y is the total cost at the
sales volume represented by x. If the company desires to earn a profit of 20% on
sales, the required sales will be.
(A) ` 40,00,000
(B) ` 35,50,000
(C) ` 24,00,000
(D) ` 20,00,000

(iii) If the capacity usage ratio of a production department is 90% and activity ratio is 99%
then the efficiency ratio of the department is ………………….. %.
(A) 100
(B) 120
(C) 110
(D) 105

(iv) Horizon Ltd. manufactures product BM for last 5 years. The Company maintains a
margin of safety of 37.5% with overall contribution to sales ratio of 40%. If the fixed
cost is ` 5 lakh, the profit of the company is
(A) ` 24.00 laks
(B) ` 12.50 lakh
(C) ` 3.00 lakh
(D) None of A, B, C

(v) In a factory where standard costing is followed, 9,600 kg. of material at `10.50/kg
were actually consumed resulting in a price variance of `4,800(A) and usage
variance of `4,000 (F). The standard cost of actual production is `
(A) 1,00,000
(B) 96,000
(C) 1,20,000
(D) 86,000

Answer:
(a)
(i) (C)
(ii) (E)
(iii) (D)
(iv) (A)
(v) (B)

(b)
(i) True

(ii) False

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 Answer to PTP_Intermediate_Syllabus 2008_Jun 2014_Set 3

(iii) False

(iv) True

(v) False

(c)
(i) Absorption

(ii) Key factor

(iii) Contract price, Cost

(iv) Cost centre or cost unit

(v) Integral

(d)
(i) (B) 5,000

Patient days in a year

= (25 beds x 120 days) + (20 beds x 80 days) + 400 beds
= 3,000 + 1,600 + 400
= 5,000 patient days

(ii) (A) `40,00,000

Variable cost = 60% , therefore, contribution to sales ratio = 40% (P/V ratio)
Company‘s target profit 20% in sales, therefore, revised contribution which covers
only fixed cost = 40% - 20% = 20%.
Required sales = fixed cost / revised contribution = ` 8,00,000/ 20% = ` 40,00,000.

(iii) (C) 110%

Efficiency ratio (ER)=Std. hr. of production ÷ Actual hrs

Activity ratio (AR) =Std. hrs for production ÷ Budgeted hrs
Capacity ratio (CR)=Actual hrs ÷ Budgeted hrs
Hence, ER = AR / CR=99% / 90% =110%

(iv) (C) 3.00 lakhs

Break even sales= ` 5 lakhs ÷ 0.40=` 12.50 lakhs

Total sales =12.50/(1-0.375)=`20.00 lakhs
Hence the profit of the company:
` 20 lakh x 0.375 x 0.40 =` 3.00 lakhs

(v) (A) 1,00,000

Total material cost variance=Material price variance + Material usage variance
=4,800 (A) + 4,000(F)
=` 800 (A)
Actual material cost=96,00 x 10.50 =`1,00,800

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 Answer to PTP_Intermediate_Syllabus 2008_Jun 2014_Set 3

Standard cost of actual production=` 1,00,800 - 800= ` 1,00,000

Question.2
(a) Compute a comprehensive machine hour rate for a machine in Production department
'A' of a factory from the following details:
Machine : Cost including installation charges ` 20,00,000
Estimated useful life 10 years
Estimated salvage value 10%
Working hours: Number of working days 300
Number of shifts per day 2
Effective working hrs per shift 7
Stoppages for repairs and maintenance etc. 200 hrs

Operating & other costs:

(i) Wages of two operators (one for each shift) @ ` 5,000 p.m.
(ii) Salary of supervisor (one for each shift) @ ` 7,500. Only one-fifth of the supervisor's
time is devoted to this machine
(iii) Electric Power : 20 units per hour, each unit costing ` 3.20
(iv) Insurance Charges : ` 5,000 per annum
(v) Repairs and Maintenance (estimated) : `12,500 p.m
(vi) Rent, rates & taxes (allocated) : `10,000 pa.
(vii) General lighting etc. (allocated) : `750 p.m
(viii) Other factory overheads (allocated) : `1,40,000 p.a [8]
Answer:
Computation of Comprehensive Machine Hour Rate
Department : Production Department A
Description of Machine
Estimated life : 10 years
Cost of Machine : `20 lakhs
Estimated salvage value : 10%
Estimated working hours : 4,000
(300 x 2 x 7 – 200)

Per Annum Per hour

` `
(A) Variable expenses:
(i) Wages of operators (`5,000 x 12 x 2) 1,20,000
(ii) Power (20 x 4000 x 3.20) 2,56,000
(iii) Repairs and maintenance (12,500 x 12) 1,50,000
5,26,000 131.50
(B) Standing charges:
(i) Salary of supervisor 1/5th of (2 x 7500 x 12) 36,000
(ii) Depreciation = `(20,00,000 – 2,00,000) / 10 1,80,000
(iii) Insurance charges 5,000
(iv) Rent, rates & taxes (allocated) 10,000
(v) General lighting, etc. (allocated) [ `750 x 12] 9,000
(vi) Other factory overheads (allocated) 1,40,000
3,80,000 95.00
Total (A + B) 9,06,000 226.50

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 Answer to PTP_Intermediate_Syllabus 2008_Jun 2014_Set 3

(b) M/s Moon Light Co. Ltd. fixes the interdivisional transfer prices for its products on the basis
of cost plus an estimated return on investment in its divisions. The relevant particular of
the budget for the Division ‘X’ for the year 2010-11 is given below:
Particulars Amount (`)
Fixed Assets 6,00,000
Current Assets (other than Cash at Bank) 3,00,000
Cash at Bank 1,00,000
Yearly fixed cost for the division 9,00,000
Variable cost per unit 10
Budgeted volume of production per year (in units) 5,00,000
Desired return on Investment 30%
You are required to determined the transfer price for Division 'X'. [5]
Answer:
Computation of the Transfer Price for Division 'X'
Particulars Amount (`)
Variable cost per unit 10.00
Fixed cost per unit (Note 1) 1.80
Profit margin per unit (Note 3) 0.60
Transfer price per unit 12.40
Working Notes:
(1) Fixed cost per unit
Yearly fixed cost for the division
=
Budgeted volume of production per year (units)
9,00,000
= = 1.8
5,00,000

(2) Investments in Division ‗X‘

Fixed Assets 6,00,000
Current Assets (3,00,000 + 1,00,000 4,00,000
10,00,000
(3) Return on investment
Desired return 30% on `10,00,000 = 3,00,000
Budgeted volume of production per year = 5,00,000 units

Desired return
Profit margin per unit =
Budgeted volume of production per year (units)
3,00,000
= = `0.6
5,00,000

(c) For a particular item of store, the following information are available:
Re-order level = 1500 units
Normal Consumption per week = 200 units
Re-order period = 3 to 5 weeks
What will be the Maximum Consumption? [2]
Answer:
Let Maximum Consumption will be m
Re-order level = Maximum Consumption × Maximum re-order period
1500= m× 5
Therefore,
5m = 1500
 m =300

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 Answer to PTP_Intermediate_Syllabus 2008_Jun 2014_Set 3

Maximum Consumption is 300 units.

Question.3
(a) The standard process cost card for a processed item is as under:
` per Kg of
Finished Product
Direct Materials 2 kgs @ `10 per kg 20
Direct Labour 3 hours @ 20 per hour 60
Fixed Overhead 90
Total 170
Budgeted output for the period is 1000 kgs.

Actual Production for a month is as under:

Material 1400 kgs
Labour 1140 kgs
Overheads 1140 kgs

Actual Cost on Actual Production for a month are as under:

Direct Material 2900 kgs = cost ` 32,000
Direct Labour 3300 hours = cost ` 68,000
Fixed Overhead ` 88,000

You are required to work out the following variances;

(i) Materials Price and Usage Variances.
(ii) Labour rate and Efficiency Variances; and
(iii) Fixed Overhead Budget Variances. [2+2+2+2+2=10]
Answer:
Material cost variance Analysis
Standard quantity of actual output = 1400 kg x 2Kg = 2800 kg.
Actual quantity = 2,900 kgs
Standard Cost = `10 per kg
Actual cost = `32,000

(i) Material price and usage variance

(a) Material price variance = (Standard price - Actual price) x Actual Quantity
= (2900 kg x 10 - 32,000)
= ` 29,000 - `32,000
= ` 3,000 (Adv)
(b) Material Usage Variance = (Standard Quantity -Actual Quantity) x Standard Rate
= (2800 kg x `10 - `29,000)
= ` 1,000 (Adv)

(ii) Labour Rate and efficiency variance

Here, standard hour for actual output = 1,140 x 3 = 3,420
Standard wage rate per hour = ` 20
Actual hours = 3300
Actual wages = ` 68,000
(a) Labour Rate Variance=
Standard Rate x Actual hours - Actual Rate
= `20 x 3,300 – `68,000
= `2,000 (adv)
(b) Labour Efficiency variance

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 Answer to PTP_Intermediate_Syllabus 2008_Jun 2014_Set 3

= (Standard hour – Actual hours) x Standard rate

= (3,420 – 3,300) x `20 = `2,400 (Fav)

(iii) Fixed overhead Budget variance

Actual Expenditure = `88,000
Budget Expenditure = 1140kgs x `90
= `1,02,600
Fixed overhead Budget variance = Actual Expenditure – Budget Expenditure
`88,000 – `1,02,600 = `14,600 (Fav)

(b) State the limitation of Activity Based Costing. [5]

Answer:
Though Activity Based Costing system is very effective, it suffers from some limitation as
given below:
(i) Activity Based Costing is a complex system and requires lot of records and tedious
calculations.
(ii) For small organization, traditional cost accounting system is more beneficial than
Activity Based Costing due to the simplicity of operation of the former.
(iii) Sometimes it is difficult to attribute costs to single activities as some costs support
several activities.
(iv) There is a need of trained professionals who are limited in number.
(v) This system will be successful if there is a total support from the top management.
(vi) Substantial investment of time and money is required for the implementation of this
system.

Question.4
(a) M/s XY Ltd. is the manufacturers of picture tubes for T.V. The following are the details of
their operation during 2013:
Average monthly market demand 2,000 Tubes
Ordering cost ` 100 per order
Inventory carrying cost 20% per annum
Cost of tubes ` 500 per tube
Normal usage 100 tubes per week
Minimum usage 50 tubes per week
Maximum usage 200 tubes per week
Lead time to supply 6-8 weeks
Compute from the above:
(i) Economic Order Quantity. If the supplier is willing to supply quarterly 1,500 units at a
discount of 5%, is it worth accepting?
(ii) Maximum level of stock
(iii) Minimum level of stock
(iv) Reorder level [4+2+2+2]
Answer:
(i) S=Annual usage of tubes = Normal usage per week × 52 weeks
=100 tubes × 52 weeks = 5,200 tubes
Co=Ordering cost per order = ` 100/- per order
C1=Cost per tube = ` 500/-
IC1=Inventory carrying cost per unit per annum
=20% × ` 500 = ` 100/- per unit, per annum
Economic order quantity:

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 Answer to PTP_Intermediate_Syllabus 2008_Jun 2014_Set 3

2SC o 2 5200 units `100

E.O.Q = = = 102 tubes (approx.)
IC `100
1
The supplier is willing to supply 1500 units at a discount of 5%, is it worth accepting.

Total cost (when order size is 1500 units)

= Cost of 5,200 units + Ordering cost + Carrying cost.
5,200units 1
=5,200 units × ` 475 + × `100+ × 1,500 units × 20% × ` 475
1,500 units 2
=` 24,70,000 + ` 346.67 + ` 71,250
=` 25,41,596.67

Total cost (when order size is 102 units)

5,200units 1
=5,200 units × ` 500 + ` 100 + 102 units × 20% × ` 500
102 units 2
=` 26,00,000 + ` 5,098.03 + ` 5,100
=` 26, 10,198.03

Since, the total cost under quarterly supply of 1,500 units with 5% discount is lower than
that when order size is 102 units, therefore the offer should be accepted. While
accepting this offer consideration of capital blocked on order size of 1,500 units per
quarter has been ignored.

(ii) Miximum level of stock

=Re-order level + Reorder quantity – Min. usage × Min. reorder period
=1,600 units + 102 units – 50 units × 6 weeks
=1,402 units.

(iii) Minimum level of stock

=Re-order level – Normal usage × Average reorder period
=1,600 units – 100 units × 7 weeks = 900 units.

(iv) Reorder level

=Maximum consumption × Maximum re-order period
=200 units × 8 weeks
=1,600 units

(b) Discuss the accounting treatment of spoilage and defectives in Cost Accounting. [5]
Answer:
Normal spoilage cost (which is inherent in the operation) are included in cost either by
charging the loss due to spoilage to the production order or charging it to production
overhead so that it is spread over all products. Any value realized from the sale of
spoilage is credited to production order or production overhead account, as the case
may be.
The cost of abnormal spoilage (i.e. spoilage arising out of causes not inherent in
manufacturing process) is charged to the Costing Profit and Loss Account. When spoiled
work is due to rigid specifications, the cost of spoiled work is absorbed by good
production, while the cost of disposal is charged to production overheads.
The problem of accounting for defective work is the problem of accounting of the costs
of rectification or rework. The possible ways of treatment are as below:

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 Answer to PTP_Intermediate_Syllabus 2008_Jun 2014_Set 3

(i) Defectives that are considered inherent in the process and are identified as normal
can be recovered by using the following methods:
Charged to good products
Charged to general overheads
Charged to department overheads
Charged to identifiable job.
(ii) If defectives are abnormal and are due to causes beyond the control of
organization, the rework, cost should be charged to Costing Profit and Loss Account.

Question.5
(a) What do you understand by the term ‘pre-determined rate of recovery of overheads’?
What are the bases that are usually advocated for such pre-determination? [3+2]
Answer:
The term ‗pre-determined‘ rate of recovery of overheads‘ refers to a rate of overhead
absorption. It is calculated by dividing the budgeted overhead expenses for the
accounting period by the budgeted base for the period. This rate of overhead
absorption is determined prior to the start of the activity; that is why it is called a ‗pre-
determined rate‘. The use of the pre-determined rate of recovery of overheads enables
prompt preparation of cost estimates and quotations and fixation of sales prices. For
prompt billing on a provisional basis before completion of work, as for example in the
case of cost plus contracts, pre-determined overhead rates are particularly useful.

Bases Available: The bases available for computing ‗pre-determined rate of recovery of
overheads‘ are given below:-
(i) Rate per unit of output
(ii) Direct labour cost method
(iii) Direct labour hours method
(iv) Machine hour rate method
(v) Direct material cost method
(vi) Prime cost method.
The choice of a suitable method for calculating ‗pre-determined rate of recovery of
overhead, depends upon several factors. Some important factors are-type of industry,
nature of product and processes of manufacture, nature of overhead expenses,
organizational set-up, policy of management etc.

(b) A company produces 30000 units of product A and 20000 units of product B per annum.
The sales value and cost of two products are as follows:
Sales value `7,60,000 Factory overheads ` 1,90,000
Direct Material `1,40,000 Administrative and selling ` 1,20,000
overheads
Direct Labour `1,90,000
50% of the factory overhead is variable and 50% of the administrative and selling
overheads are fixed. The selling price of A is ` 12 per unit and ` 20 per unit for B.
The direct material and labour ratio for product A is 2:3 and for B is 4:5. For both the
products, the selling price is 400% of direct labour. The factory overheads are charged in
the ratio of direct labour and administrative and selling overheads are recovered at a flat
rate of ` 2 per unit for A and ` 3 per unit for B.
Due to fall in demand of the above products, the company has a plan to diversify and
make product C using 40% capacity. It has been estimated that for C direct material and
direct labour will be `2.50 and `3 per unit respectively. Other variable costs will be the
same as applicable to the product A. The selling price of product C is ` 14 per unit and
production will be 30000 units. -

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 Answer to PTP_Intermediate_Syllabus 2008_Jun 2014_Set 3

Assuming 60% capacity is used for manufacture of A and B, Calculate —

(i) Present cost and profit;
(ii) Cost and profit after diversification;
Give your recommendations as to whether to diversify or not. [4+4+2]
Answer:
(i) Statement Showing Present Cost and Profit
Particulars Product A Product B Total (`)
i) Production and sales (units) 30,000 20,000 50,000
ii) Sales value (`) 3,60,000 4,00,000 7,60,000
iii) Variable costs —
Direct material 60,000 80,000 1,40,000
Direct labour 90,000 1,00,000 1,90,000
Factory overheads 45,000 50,000 95,000
Administrative and selling 30,000 30,000 60,000
overheads
iv) Total variable costs 2,25,000 2,60,000 4,85,000
v) Contribution (ii-iv) 1,35,000 1,40,000 2,75,000
vi) Fixed costs 1,55,000
vii) Profit (v - vi) 1,20,000

(ii) Statement Showing cost and Profit after Diversification

Particulars Product A Product B Product C Total
i) Capacity levels 60% 60% 40%
ii)Production and sales (units) 18,000 12,000 30,000 60,000
iii)Sales value (`) 2,16,000 2,40,000 4,20,000 8,76,000
Variable costs —
Direct material 36,000 48,000 75,000
Direct labour 54,000 60,000 90,000
Factory overheads 27,000 30,000 45,000
Administrative and selling 18,000 18,000 30,000 -
overheads
iv) Total variable costs 1,35,000 1,56,000 2,40,000 5,31,000

v) Contribution (iii – iv) 81,000 84,000 1,80,000 3,45,000

less: Fixed cost

Factory overheads 95,000

Administrative and selling 60,000
overheads
vi) Total Fixed overheads 1,55,000
Profit (v – vi) 1,90,000
Recommendation:
The company should implement the proposed diversification as it has resulted into
increase in the profit from `1,20,000 to `1,90,000.

Question.6
(a) The financial records of Modern Manufacture Ltd. reveal the following for the year ended
30-6-2013:
` in ‘000
`
Sales (20,000 units) 4,000
Materials 1,600

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 Answer to PTP_Intermediate_Syllabus 2008_Jun 2014_Set 3

Wages 800
Factory Overheads 720
Office and Administrative Overheads 416
Selling and Distribution Overheads 288
Finished Goods (1,230 units) 240
Work-in-progress 48
Labour 32
Overheads (Factory) 32 112
Goodwill written off 320
Interest on Capital 32
In the Costing records, factory overhead is charged at 100% wages, administration
overhead 10% of factory cost and selling and distribution overhead at the rate of ` 16 per
unit sold.
Prepare a statement reconciling the profit as per cost records with the profit as per
financial records of the company. [10]
Answer:

Profit & Loss Account of Modern Manufacturers

for the year ended 30-6-2013
(` in 000)
To Materials 1,600 By Sales 4,000
(20,000 units)
To Wages 800
To Factory Overheads 720 By Finished Goods 240
To Office and Admn. 416 1230 units
Overheads
To Selling & Distribution 288 Work-in-Progress 112
Overheads
To Goodwill written off 320
To Interest on Capital 32
To Net Profit 176 _____
4,325 4,352
Profit as per Cost Record
` In ‗000)
Materials 1,600
Wages 800
Prime Cost 2,400
Factory Overhead 800
(100% of wages)
Gross Factory Cost 3,200
Less: Closing WIP 112
Factory Cost 3,088
(21,230 units)
Add: Office & Administrative Overhead 308.80
(10% of Factory Cost)
Total Cost of output 3,396.80
Less: Closing stock (1,230 units) of Finished Goods 196.80
(See Working Note 1)
Cost of Production of 20,000 units 3,200.00
Selling and Distribution overhead 320.00
(@ ` 16 p u.) _______
Cost of sales 3,520.00

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 Answer to PTP_Intermediate_Syllabus 2008_Jun 2014_Set 3

(20,000 units)
Sales Revenue 4,000.00
(20,000 units) _______
Profit 480.00

Reconciliation Statement
`(‘000) ` (‗000)
Profit as per Cost Accounts 480
Add: Factory overhead Overabsorbed 80
(800-720)
Selling and Distribution Overhead 32
Overabsorbed
(320-288)
Closing stock overvalued in Financial 43.20 152.2
Accounts
(240-196.8) 635.20
Less: Office & Administrative Overhead 107.20
underabsorbed
(416-308.80)
Goodwill written off 320.00
Interest on Capital 32.00 459.20
Profit as per Financial Accounts 176.00

Working Note:
1. Cost per unit of finished goods=Total cost of output/Total number of units produced
=` 3396.80 Thousand/ 21,230 units
= ` 160
Cost of 1230 units=`160 x 1230
= ` 1,96,800

(b) State the feature of Standard Cost. [5]

Answer:
Features of Standard cost are stated below:
(i) Predetermined cost on scientific basis.
(ii) Built up from the assessment of the value of cost elements.
(iii) Emphasizes what should be the cost
(iv) Used for analysis of variance
(v) Service as effective tool for cost control.
(vi) Promotes possible cost reduction.
(vii) Forms basis for establishing bids and contracts for setting selling prices.
(viii) Facilitates ‗Management by exception‘.
(ix) Used as an aid to budgeting
(x) Provides incentive and motivation to work with greater efforts and vigilance for
achieving standard.

Question.7
(a) From the following particulars, prepare the following in the books of X Ltd.
(i) Statement of equivalent production
(ii) Statement of apportionment of cost.
Opening stock as on 1st August; 200 units @ `4 per unit
Degree of completion: Materials 100%, labour and Overheads 40%
Units introduced during. August: 1,050 units

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 Answer to PTP_Intermediate_Syllabus 2008_Jun 2014_Set 3

Output transferred to the next process: 1,100 units

Closing stock : 150 units
Degree of completion: Materials 100%,Labour and Overheads 70%
Other relevant information regarding the process:
Materials: `3,150, Labour, `4,500 and Overheads: `2,250 [4+4]
Answer:
(i) Statements of Equivalent Production
Input Output Equivalent Production
Material Lab. & Ovd.
Item Units Item Units Units % of Units % of
comple completi
tion on
Opening 200 Work on opening WIP 200 - - 120 60
WIP
Introduced 1050 Units introduced and 900 900 100 900 100
completed
Closing stock 150 150 100 105 70
1,250 1,250 1,050 1,125

(ii) Statement of cost of each element of equivalent production

Element of cost Cost (`) Eqv. Prodn. Cost per unit (`)
Material 3,150 1,050 3
Labour 4,500 1125 4
Overhead 2,250 1125 2
9,900 9

(iii) Statement of Apportionment of Cost

Items Elements Equivalent Cost/ Unit Cost (`) Total (`)
Production (`)
Opening WIP Material - - - -
(for completion) Labour 120 4 480
Overhead 120 2 240 720
Units introduced Material 900 3 2,700
& completed Labour 900 4 3,600
Overhead 900 2 1,800 8,100
Closing Stock Material 150 3 450
Labour 105 4 420
Overhead 105 2 210 1,080
9,900

(b) The budgeted overheads and cost driver volumes of Neptune Ltd. are as follows:
Cost Pool Budgeted Overheads Cost driver Budgeted Volume
(`)
Material procurement 2,90,000 No. of orders 550
Material handling 1,25,000 No. of movements 340
Set-up 2,07,500 No. of set-ups 260
Maintenance 4,85,000 Maintenance 4,200
hours
Quality control 88,000 No. of inspection 450
Machinery 3,60,000 No. of M/C hours 12,000

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 Answer to PTP_Intermediate_Syllabus 2008_Jun 2014_Set 3

The firm has produced a batch of 2,600 components of AXL-5, its material cost was
`1,30,000 and labour cost `2,45,000.
The usage activities of the said batch are follows:
Material orders -26 Maintenance hours -690
Material movements -18 Inspection -28
Set-ups -25 M/C hours -1,800
Required:
(i) Calculate cost driver rates that are used for tracing appropriate amount of overheads
to the said batch; and
(ii) Ascertain the cost of batch of components using activity based costing. [3+4]
Answer:
(i) Cost Driver Data
Particulars Details Rate of Cost Drivers
Material Procurements 2,90,000/550 `527
Material handling 1,25,000/340 `368
Set-up 2,07,500/260 `798
Maintenance 4,85,000/4,200 `115
Quality Control 88,000/450 `195
Machinery 3,60,000/12,000 `30
(i) Calculation of Batch of 2,600 components
Amount (`) Amount (`)
Direct materials 1,30,000
Direct labour 2,45,000
Prime Cost 3,75,000
Add:-Overhead:
Material procurements (26x`527) 13,702
Material handling (18x`368) 6,624
Maintenance (690x `115) 79,350
Set ups (25x`798) 19,950
Qualiy control (28x`195) 5,460
Machinery (1800x `30) 54,000 1,79,086
5,54,086

Question.8 Write short notes on any three from the following: [3x5=15]
(a) Job evaluation
(b) Uniform Costing
(c) Cost driver
(d) Zero-Base Budgeting
(e) Concept of split off point and joint cost

Answer:
(a) Job Evaluation (JE):
Is necessary for the management of any organization to establish paper wage and
salary structure for various jobs. For doing this in a scientific manner, it is necessary to
determine the relative value of jobs and hence a job evaluation is done. It is a technique
of analysis and assessment of jobs to determine their relative value within the firm. It aims
at providing a rational and equitable basis for differential salaries and wages for different
classes of worker
Following are some of its basis objectives:
 JE helps in developing a systematic and rational wage structure as well as job
structure

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 Je aims at removing the controversies and disputes relating to salary between the
employers and employees.
 It aims to bring in fairness and stability in the wage and salary structure. JE discloses
characteristics and conditions relating to different jobs.
The following are the methods of job evaluation:
Point Ranking method, Ranking method, Grading method and factor comparision
method.

(b) Uniform costing:

Uniform Costing is a technique of cost accounting which ensures application of uniform
accounting method in a number of concerns in the same industry or sometimes in all the
units under the same management.
Uniform Cost Accounting system is defined as "a system using common concepts,
principles and standard accounting practices adopted by different Entities in the same
industry to facilitate inter-firm comparison".
Therefore, the main objective of Uniform Costing is Inter-firm Comparison.
For better perception and judgement of performance of individual units/undertakings by
a comparative study, the performance/achievement must be expressed in the same
denomination so that like is compared with like. This sort of study originated in the printing
industry.

(c) Cost Driver:

―Cost driver is any factor which causes a change in the cost of an activity, e.g. the
quality of parts received by an activity is a determining factor in the work required by
that activity and therefore affects the resources required. An activity may have multiple
cost drivers associated with it‖. In other words, cost driver means the factors which
determine the cost of an activity. Cost driver is an activity which generates cost. Cost
driver are link between activity and cost. Activity based costing identifies the activities
the activities that causes cost to be incurred, and searches for fundamental cost drivers
of those activities. Once the activities and their drivers have been identified, this
information is used to attach overhead to those cost objects like products etc. that have
actually caused the costs to be incurred.

(d) Zero Base Budgeting

Zero Base Budgeting is a method of budgeting starting from scratch level. Proposals for
the coming period should be based on merit and not related to past performance.
Budgets prepared by conventional methods are the incremental type of budget based
on actual performance in the past periods. In the Zero base budgets, the result of the
past year is not accepted as basis, since the past may conceal inefficiencies.
Zero base budgets are mainly prepared by taking the following steps.
(i) Identification of decision units.
(ii) Preparation of decision packages.
(iii) Ranking of decision package using cost benefit analysis.
(iv) Allotment of available funds according to the priority determined by ranking each
decision package is a self contained module explaining the need for a certain
activity, its cost, its benefits consequences if the packages is not accepted, etc. The
ranking of package based on cost benefit analysis by the difficult levels of
management starting from the bottom upwards ensures allotment of funds to
relatively more important and essential activities.

(e) Concept of split off point and joint cost

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 Answer to PTP_Intermediate_Syllabus 2008_Jun 2014_Set 3

Split off point is a point to which input factors are commonly used for production of
multiple products which can be either joint products or by products. In other words, upto
a certain stage the manufacturing process is the same for all the products and a stage
appears after which the individual processing becomes difficult.
Joint cost is the separation cost of commonly used input factors for the production
multiple products. So all costs incurred before or upto the split off point are termed either
as joint costs or pre separation costs and the appointment of these costs is the prime
objective of the joint product accounting. Cost incurred after the split off point are post
separation costs and can be identified with the product.

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