P 12.

8 Garden Tools Manufacturers Ltd, (GTML) produces garden tools and lawn
maintenance products that are sold through an All-India chain of stores. The
GTML manufactures more than 50 products and approximately 20 per cent of its
revenue comes from selling small home garden tools such as rakes, pruners and
spades. It also manufacturers high-quality lawn movers, edgers and blowers for
professional lawn service companies. Sales of these products, however, have not
been a major source of revenue.
The CFO of GTML, Harsha Desai, is concerned about the apparent profitability
of two of its products, namely, (i) a high-volume product Model-300 spade and
(ii) a low-volume product, Model-800 movers.
At the beginning of current year, the total estimated manufacturing overhead was
Rs 20,00,00,000 and the estimated total labour cost was Rs 4,00,00,000. For the
current year, the expected sales revenues from sale of Model-300 spade and
Model-800 mowers are summarized below:
1
2
3
4

Number of units sold

Sales revenue
Direct labour cost
Direct material cost

Model-300 Spade
42,500
Rs 38,25,000
4,59,000
7,65,000

Model-800 Mower
400
Rs 12,00,000
60,000
2,40,000

The GTML allocates manufacturing overheads to products based on direct labour cost.
The products process for spades is fairly simple. The GTML uses one supplier for the
metal handle and blade. It produces shafts on an automatic lathe and the handles, blades
and shafts are assembled by had at single workstation.
The production process for mowers is much more complicated. Twenty suppliers
are used to supply the 50 components involved in producing the Model-800. Moreover,
assembly of mowers makes uses of 15 separate assembly workstations.
The estimated total manufacturing overhead (Rs 20,00,00,000) is related to four
cost drivers as shown below:
Overhead cost
item/pool
(1)
1 Set up costs

Annual cost

Cost driver

(2)
Rs 2,00,00,000

(3)
Number of
setups
Number of
material
requisitions
Number of
requisition
Number of
work-stations
used in
production of
product

2
Material
handling cost

1,00,00,000

3 Depreciation
of equipment
4
Others
12,00,000

5,00,00,000

Estimated
annual value
(4)
1,000

Cost per driver

unit
(5)
Rs 20,000

2,000

5,000 per
requisition

20,000

2,500 per
machine-hour
40,000 per
workstation

3,000 workstations across

all products

The production information for 42,500 spades (Model-300) and 400 Mowers
(Model-800) is summarized below:
1
2
3
4

Number of setups
Number
of
material
requisitions
Number of machine-hours
Number of workstations

Model-300 Spade
2
3
40
1

Model-800 Mower
5
50
100
15

REQUIRED:
From the above information, compute the profitability of the two products: M-399 spade
and M-800 mowers, using (a) traditional costing approach/system and (b) ABC
system/approach to allocate manufacturing overheads. Comment on the differences in (a)
and (b).
SOLUTION:
(a)

Profitability of Model 300 and 8(Traditional/Production Volume based

Approach)

Particulars

Model-300 spade
Model-800 mower
(42,500 units)
(400 units)
1 Sales revenue
Rs 38,25,000
(400 x Rs 3,000)
Rs 12,00,000
(42,500 x Rs 90)
2 Direct labour cost
4,59,000
60,000
3 Direct material
7,65,000
2,40,000
cost
4 Overheads
22,95,000 0
3,00,00000
5 Total cost (2 + 3 +
35,19,000
6,00,000
4)
6 Gross Profit (1
3,06,000
6,00,000
5)
7 Cost per unit [(5)/
82.8 [(5) / 400]
-1,500
42,500]
8 Gross profit per
7.2 [(6) / 400]
1,500
unit [(6) / 42,500]
9 Gross profit as %
8.0
50
of sales (%) (6 / 1)
0
Direct labour cost, Rs 4,59,000 x 5 (manufacturing cost Rs 20,00,00,000 / Rs
4,00,00,000 labour cost) = Rs 22,95,000
00
Rs 60,000 x 5 = Rs 3,00,000

(b) Profitability of Model-300 and Model-800 (ABC Approach)

Particulars
Model-300 spade Model-800 mower
(42,500 units)
(400 units)
1 Direct labour cost
Rs 4,59,000
Rs 60,00
2 Direct material cost
7,65,000
2,40,000
3 Overheads:
(i)
Setup costs (Rs 20,000 x 2)
40,000
(Rs 20,000 x 5)
1,00,000
(ii)
Material handling cost
(Rs 5,000 x 3)
15,000
(Rs 5,000 x 50)
2,50,000
(iii)
Depreciation of equipment
(Rs 2,500 x 40)
1,00,000
(Rs 2,500 x 100)
2,50,000
(iv)
Others
(Rs 40,000 x 1)
40,000
(Rs 40,000 x 15)
6,00,000
Total overheads
1,95,000
12,00,000
4 Total cost
14,19,000
15,00,000
5 Cost per unit
33.4
3,750
6 Selling price per unit
90.0
3,000
7 Gross profit per unit
56.6
(-750)
8 Gross profit as % of sales (%)
63.0
(25)
(c)

Comparison of Profitability of Model-300 and Model-800

Particulars
Traditional approach
ABC approach
Model-300 Model-800 Model-300 Model-800
1 Cost per unit
Rs 82.8
Rs 1,500
Rs 33.4
Rs 3,750
2 Gross profit as %
8.0
50
63.0
(25)
of sales
COMMENT: The cost of Model 300-drops from Rs 82 in the traditional approach to Rs
33.4 per unit in the ABC approach and the cost of Model-800 increases from Rs 1,500 to
Rs 3,750. The ABC approach reveals that the high-volume product (Model-300 spades)
is very profitable as reflected in the gross profit margin (63%) while the selling price (Rs
3,000) does not cover even the full cost (Rs 3,750) of the low-volume product (Model800) with a negative (-25%) gross margin.
CASES
12.C.1 ABC and Customer Profitability
To increase its share of deposits accounts, the UTI Bank Ltd (UBL) took two actions
recently: first to respond to depositor-customers inquiries about balances, clearance of
cheques and fee charged, it set up a call centre: second, it paid year-end bonuses to
branch managers who met the target in terms of additional customers. Inspite of the fact
that 75 per cent of the branch managers met the target increase in the number of
customers, the profits of the UTI Bank Ltd (UBL) continued to decline. It was not clear

to the CEO, Pulin Naik, why inspite of serving more customers, profits of the UBL were
declining. The branch manager of Cannaught Circle Branch, Dinesh Parekh, noticed that
retail customers were increasing but there was a decline in the number of business
customer.
The costing system of the UBL was developed in 1996 when it was setup. It is still in
operation. According to current practice, no costs are traced directly to customers. The
total indirect costs are assigned simply to customer lines (i.e. retail customers and
business customers) in terms of the total number of cheques processed.
Dinesh suspected that the current costing system of UBL was responsible for the state of
affairs. He wondered if an ABC system, with customer-line as the primary cost object,
could be introduced in UBL.
The top management of UBL was initially skeptical about any such move in view of the
decline in its profit. Dinesh Parekh finally succeeded in persuading the CEO, Pulin Naik,
to allow a pilot ABC study for the five branches of UBL located in Delhi. An
implementation team including Dinesh and the managers of the other four branches of
UBL was constituted for the purpose.
As a first step, the implementation team identified three activities: (i) cheque payments,
(ii) tellers withdrawals and deposits and (iii) customer service call centre.
The second step was to scrutinize the total indirect costs of all the New Delhi branches.
The implementation team of the pilot study classified the components of the indirect cost
into appropriate activity pools as summarized below:
Cost

Activity cost pool to which Estimated total cost for New

cost is assigned
Delhi Branches
1 Salary of chequeCheque-payments
Rs 22,00,000
processing personnel
2 Depreciation on chequeCheque-payments
35,00,000
processing equipment
3 Teller salary
Teller withdrawals/deposits
60,00,000
4 Salary at call centre
Customer service call centre
22,50,000
5 Toll free phone lines at Customer service call centre
call centre
3,00,000
Total indirect costs
1,42,50,000
The implementation team also identified the following cost drivers:
Activity cost pool
1 Cheque payments
2 Teller withdrawals/deposits
3 Customer service call centre

Activity cost driver

Number of cheques processed
Number of teller transactions
Number of calls

The ABC team then identified the retail customer lines and business customer lines listed
below:
Activity cost driver
Number of units Number of units of
Total
of activity cost
activity cost driver
driver by retail
used by business
customers
customers
(1)
(2)
(3)
(4)
1 Cheques processed
57,00,000
2,28,00,000
2,85,00,000
2 Teller transactions
16,00,000
4,00,000
20,00,000
3 Customer call centres
4,75,000
25,000
5,00,000
4 Deposit accounts
7,50,000
2,50,000
10,00,000
The average revenues (from interest earned on account balances) from each type of
account earned by the UBL is: (i) per retail customer account, Rs 50 and (ii) per business
customer account, Rs 200.
REQUIRED:
(A)
Using the current cost accounting practices of UBL
1. compute the indirect cost allocation rate,
2. determine the total indirect cost assigned to the retail customer lines and
business customer lines,
3. compute the proportion of the total indirect cost assigned to the retial
customer line and business customer line
4. determine the indirect cost per retail and business account,
5. assuming that there are no direct costs, compute the average profit per account
for retail and business customers.
(B)
Using the proposal ABC System:
1. compute the indirect cost allocation rate for each of the three activities:
cheques payments, teller withdrawal/deposits and customer call centre,
2. calculate the activity-wise total indirect costs allocated to each retail and
business customer lines,
3. compute the proportion of each activitys resources used by the retail and
business customer lines,
4. compute the indirect cost per retail and business customer account,
5. compute the average profit per account of both retail and business customers.
(C)
Was UBLs bonus-based incentive plan to increase the number of deposit accounts
a sound strategy? In the light of the ABC analysis, what changes would you
suggest in the strategy? What benefits can UBL get from the ABC analysis?
12.C.2 ABC and Distribution Channel Profitability In January, current year, the top
management of Color Plus Ltd, was debating the relative profitability of its three
distribution channels: (a) catalogue sales, (b) corporate sales and (c) retail sales. They
asked Deepak Parekh, a financial analyst, to conduct a channel profitability analysis. The
results of his analysis would have a significant bearing on the companys distribution
strategy.
Color Plus Ltd, sells garments. It contracts out the manufacturing of all products
to outside supplies. Its employees maintain a large catalogue mailing list. The catalogue

buyers, mostly individuals, place generally small quantity orders by phone or over the
Internet.
The corporate sales orders are generally large-quantity orders and are brought in
through the field sales force of Color Plus. About three-quarters of corporate orders
involve time-consuming order specification and/or price negotiation by the salesman and
usually some design experts.
Most of the retail orders are also procured by the field sales force through
personal visits to retail outlets. The buyers generally purchase medium quantities of
goods at wholesale prices. Some of the retailers require special product labeling and
packaging.
Currently all the three distribution channels look profitable as shown in Exhibit 1.
Exhibit 1 Gross Margin Levels of Distribution Channels
Distribution Channels (Amount Rs thousands)
Catalogue
Corporate
Retail
Total
Sales
Rs,50,000
Rs 50,000
Rs 1,00,000
Rs 3,00,000
Cost of sales
75,000
32,500
70,000
1,77,500
Gross margin
75,000
17,500
30,000
1,22,500
The CFO of Color Plus believes that the gross margin-level measure may be a
misleading performance indicator. He noted that the selling, general and administrative
(SGA) expenses were below the gross margin line. His institution was that if the SGA
costs were allocated to distribution channels, quite a different performance picture may
result. To address his concern, Deepak Parekh was assigned the responsibility of looking
into the SGA costs.
During the course of the study to identify the relevant SGA expenses, Deepak
noticed that direct sales force was paid a 10 per cent commission on the sales brought in
by them. The other SGA expenses for current year were found by Deepak as given
below:
Item
1.
2.
3.
4.

Marketing and sales support

Design
Information system
General administration

Amount (Rs thousand)

Rs 30,000
4,500
10,000
15,000
59,500

After identifying the relevant SGA expenses, Deepak proceeded to identify the
major activities that were the cause of SGA expenses. Exhibit 2 shows Deepak Parekhs
estimate of the proportion of each of the SGA expense items caused by each of the
activities identified by him.
Exhibit 2 Activity-wise SGA Expenses
SGA Items
Activities
Customer Take
Take
Special
Process
Others Total
mailing
phone
field
negotiation customer
or
order
field order invoice

internet
order
10%

1 Marketing 10%
30%
50%
100%
and
sales
support
2 Design
90%
10%
100%
3 Information 10%
10%
80%
100%
system
4
General 10%
10%
80%
administration
Deepak Parekhs next task was to assign the costs of each of the activities to the
distribution channels. The information collected by him is given in Exhibit 3.
Exhibit 3 Channel-wise Cost of Activities
Activity
Channels
Catalogue
Corporate
Retail
Total
1
Customer
1,96,000
2,000
2,000
2,00,000
mailings
2 Number of
6,000
60
120
6,180
phone orders
3 Number of
800
800
1,600
field orders
4 Number of
600
200
800
field
orders
requiring
special
negotiation
5 Total number
6,000
860
920
7,780
of orders (2 +
3)
REQUIRED:
(a)
Calculate the profitability of each of the three distribution channels both in terms
of total amount and return on sales.
(b)
What are the implications of these for the distribution strategy of Color Plus?
12.C.3 ABC and Product Pricing Jay Engineering manufacturers electronic testing and
measurement instruments. Many products are customer designed with recent orders for
function generators, harmonic analysers, logic analysers, temperature measurement
instruments and data logging instruments. Jay prices its instruments at 33 per cent over
estimated cost (excluding administrative and selling costs).
It has come to the notice of the CEO of Jay that its sales-mix has changed. It is
receiving fewer larger orders for simple instruments and more small orders for complex
instruments. The CEO intuitively feels that the reason for Jay not being price competitive
for simple products may the current cost accounting system. On the suggestion of
Director (operations), he hires Jain Consultants to conduct a study to switch to ABC
system.

Jain Consultants have selected two recent orders for study: (i) a 1,600 unit order
for a temperature monitoring instrument and (ii) an order for 2 harmonic analysers. The
costs and price data relating to them are given in Exhibit 1.
Exhibit 1 Cost and Price Data

1 Component cost per unit

2 Direct labor per unit
3 Overhead per unit
4 Cost per unit
5 Markup (30%)
6 Price per unit
7 Number of units
8 Value or order

Temperature
Monitor
Rs 800
80
400
1,280
384
1,664
1,600
26,62,400

Harmonic
Analyser
Rs 8,000
1,600
8,000
17,600
5,280
22,880
2
45,760

Currently, the overhead (Rs 16,00,00,000 annually) is applied based on

direct labour cost (Rs 3,20,00,000). Jain Consultants have broken down the annual
overheads into six cost pools and identified the related cost driver as given in Exhibit 2.
Exhibit 2 Cost Pools and Cost Drivers
Cost Pools
Annual Cost
Annual Cost Driver
1 Production design
Rs 2,40,00,000 2,40,000 design-hours
2 Material ordering and handling
3,20,00,000 2,00,000 unique part numbers
3 Inspection
1,00,00,000 8,00,000 inspections
4 Setup
60,00,000 1,00,000 setups
5 Labour-related overheads
2,40,00,000 Rs 3,20,00,000 direct labour cost
6 Depreciation of plant and equipment
6,40,00,000 4,00,00,000 machine-hours
Total
16,00,00,000
Jain Consultants have also estimated that the temperature monitoring instrument
and the harmonic analyser make use of the cost drivers as shown in Exhibit 3.
Exhibit 3 Use of Cost Drivers by the Monitor and Analyser
For 1,600
For 2 Analysers
Monitors
Number of design-hours
84
200
Number of unique parts
30
40
Number of inspections
400
30
Number of setups
1
1
Machine-hours
200
10
REQUIRED:
a. Based on Jain Consultants data, compute the cost per unit of each product using the
ABC approach.

b. Based on Jain Consultants work, Jay Engineering has introduced an ABC system (as
per Exhibit 2). Recently, Jay has received order from Amity International for a unique
data logging device, requiring Rs 32,000 of components and Rs 8,000 of direct labour
together with the following requirements:
Number of design-hours
50
Number of unique parts
30
Number of inspections
20
Number of setups
1
Machine-hours
16
Amity International has indicated that they already have a quote from another
supplier for Rs 38,000. Calculate the cost of data logging device, using the ABC
approach. How does it stand in relation to the competitors quote?
CASE
C.17.1 (Profit Planning) Sound Future Communications Limited (SFCL) is
planning profit for the current year. The Chairman and Managing Director of the
Company, Mr wise has asked the Accounts and Finance Department to prepare
the budget outlining the implications of achieving the profit goal of Rs 7 lakh.
The Budgeting Department has complied the information related to its operating
and financing activities as detailed in schedules I to VIII.
I.
Balance Sheet as at March 31 of the Current Year
Liabilities
Amount
Assets
Amount
Share capital
Rs 31,77,428 Fixed assets
Rs 48,00,000
Retained
18,96,400 Less:
(12,00,000)
earnings
Accumulated
Rs 36,00,000
depreciation
Creditors
44,000 Inventories:
Direct
materials
1,35,828
Finished
goods
1,60,000
2,95,828
Debtors
11,20,000
Less:
Provision for
bad debts
(64,000)
10,56,000
__________ Cash
2,40,000
51,91,828
51,91,828
Notes: (I) Debtors include Rs 1,60,000 from the third quarter sales of Rs
20,00,000 and Rs 9,60,000 from fourth quarter sales of Rs 12,00,000; (ii) Direct
materials include 6,300 kgs of material A @ Rs 5.88 per kg and 12,600 kgs
II. Budget assumptions
(i)
Selling price, Rs 60 per unit
(ii)
Quarterly sales forecast (units)

Quarter
First
Second
Third
Fourth

Next year Year following next year

20,000
30,000
30,000
40,000
20,000

III. Inventory policy

Finished goods: 20 per cent of the following quarters requirements at the

end of each quarter.

Raw materials: 30 per cent of the following quarters requirements at the

end of each quarter.

The film wishes to have 9,200 kgs of each type of direct material on hand
at March 31 of the next year.
IV Manufacturing cost per unit
Direct materials:
1 kg of A @ Rs 5.88
Rs 5.88
2 kgs of B @ Rs 7.84
15.68
Rs 21.56
Direct labour: 0.5 x direct
labour-hour @ Rs 8
4.00
Overheads:
Valuable (0.5 x direct
labour-hour @ Rs 12)
6.00
Fixed (Rs 8,44,000 per
year/Normal level of
activity, 1,00,000 units)
8.44
14.44
Total
40.00
The quarterly fixed manufacturing costs of Rs 2,11,000 include
depreciation totaling Rs 50,000. All production variances are written off as an adjustment
to the cost of goods sold in the period in which they occurred. The firm follows
absorption costing method for income determination.
V. Selling and administrative costs:
Commission and distribution, Rs 6 per unit sold
Advertising Rs 10,000 per quarter
Administrative, Rs 20,000 per quarter
VI. Cash disbursement policy: Raw materials are purchased on terms of 2/10, net/30.
Discount is always taken and purchases are recorded at net; 90 per cent of the purchases
are paid for in the quarter of purchase and remainder are paid for in the following quarter.
The list prices of materials A and B are Rs 6 per kg and Rs 8 per kg respectively. With
the exception of income taxes, which are paid during the following quarter, all other
payments are made when incurred.
VII. Cash collection experience: 20 per cent sales are for cash and 80 per cent are on
credit. The terms of sales are 2/10, net/60 days. However, for payments, the sales are

billed to customers on the first day of the following quarter; 0 per cent of the credit sales
are collected during the discount period and another 40 per cent are received after the
discount period but during the quarter in which the billing is done; 7.5 per cent are
received during the following quarter and 2.5 per cent are bad debts. These accounts are
written off at the end of the 2nd quarter following the sales. A provision of 2 per cent of
sales is made for bad debts at the time of sales. Sales discounts are recorded as a
deduction from sales in the quarter the discounts are taken. Based on prior experience,
this deduction equals 0.8 per cent of the previous quarters sales (0.8 x 0.5 x 0.02).
VIII. Other information:

Income tax rate os 50 per cent.

Cash dividends amount to Rs 80,000 at the end of quarter 2 and quarter 4.

At the end of the 4th quarter, equipment coasting Rs 6,00,000 was

purchased.
Prepare a comprehensive, quarter-wise, budget to show the projected income of SFCL for
the year.
SOLUTION
Quarter
Units sales
Unit sale price
Sales revenue
Quarter
Sales
Add: Desiring
closing
inventory (0.20
x next quarter
Total finished
goods
requirement
Less: Opening
inventory
Required
production
Quarter
Required
production
(units)
Variable Costs:
A (Rs 5.88 per
unit)
B (Rs 15.68 per

Quarter-wise Sales Forecast Schedule

First
Second
Third
Fourth
Total
20,000
30,000
40,000
20,000
1,10,000
X Rs 60
X Rs 60
X Rs 60
X Rs 60
X Rs 60
12,00,000
18,00,000
24,00,000
12,00,000
66,00,000
Production Budget (Units)
First
Second
Third
Fourth
Total
20,000
30,000
40,000
20,000
1,10,000

6,000

8,000

4,000

6,000

6,000

26,000

38,000

44,000

26,000

1,16,000

4,000

6,000

8,000

4,000

4,000

22,000
32,000
36,000
22,000
Quarterly Manufacturing Cost Budget
First
Second
Third
Fourth
Total
22,000
32,000
36,000
22,000

Rs
1,29,360

1,12,000
1,12,000

Rs 1,88,160

Rs 2,11,680

Rs 1,29,360

Rs 6,58,560

5,01,760

5,64,480

3,44,960

17,56,160

unit)
Direct
labour
(Rs 4 per unit)
Overheads (Rs
6 per unit)
Fixed costs:
Depreciation
Other overheads
Total costs
Budgeted fixed
costs
Less:
Fixed
costs charged
(@ Rs 8.44 per
unit)
Capacity
variance

3,44,960
1,28,000

1,44,000

88,000

4,48,000

1,92,000
10,09,920

2,16,000
11,36,160

1,32,000
6,94,320

6,72,000
35,34,720

50,000

50,000

50,000

50,000

2,00,000

1,61,000
2,11,000
9,05,000
2,11,000

1,61,000
2,11,000
12,20,920
2,11,000

1,61,000
2,11,000
13,47,160
2,11,000

1,61,000
2,11,000
9,05,320
2,11,000

6,44,000
8,44,000
43,78,720
8,44,000

1,85,680

2,70,080

3,03,840

1,85,680

9,45,280

59,080
92,840
25,320
(Unfavourable)* (Favourable)** (Favourable)

1,01,280
(Unfavourable)

88,000
1,32,000
6,94,320

25,320

(Favourable)
*Underrecovery/Underabsorption
of
fixed costs;
**
Overrecovery/overabsorption
of
fixed costs
Quarterly Purchase Budget of Raw Materials
Quarter
First
Second
Third
Fourth
Total
Material (A):
Production
requirement
(in units)
22,000
32,000
36,000
22,000
1,12,000
Raw material
required @ 1
kg per unit
22,000
32,000
36,000
22,000
1,12,000
Add: Desired
ending
inventory (30
per cent of the
next quarters
requirement)
9,600
10,800
6,600
9,200
9,200
Total

requirement
Less: Opening
inventory
Purchase
requirement
(kgs)
Purchase cost
(@ Rs 5.88
per kg)
Material (B):
Raw material
required @ 2
kg per unit
Add: Desired
ending
inventory (30
per cent of the
next quarters
requirement)
Total
requirements
Less: Opening
inventory
Purchase
requirement
(kgs)
Purchase cost
(@ Rs 7.84
per kg)
Total purchase
cost (A + B)

31,600

42,800

42,600

31,200

1,21,200

6,300

9,600

10,800

6,600

6,300

25,300

33,200

31,800

24,600

1,14,900

Rs 1,48,764

Rs 1,95,216

Rs 1,86,984

Rs 1,44,648

Rs 6,75,612

44,000

64,000

72,000

2,24,000
44,000

19,200

21,600

13,200

9,200
9,200

63,200

85,600

85,200

2,33,200
53,200

12,600

19,200

21,600

12,600
13,200

50,600

66,400

63,600

2,20,600
40,000

Rs 3,96,704

Rs 5,20,576

Rs 4,98,624

5,45,468

7,15,792

6,85,608

Rs 17,29,504
Rs 3,13,600
24,05,116
4,58,248

Quarterly Selling and Administrative Expenses Budget

Quarter
First
Second
Third
Fourth
Total
Units sales
20,000
30,000
40,000
1,10,000
Variable Costs:
20,000
Commission and
distribution (Rs 6
per unit)
Rs 1,20,000
Rs 1,80,000
Rs 2,40,000
Rs 6,60,000
Fixed costs:
Rs 1,20,000
Advertising
10,000
10,000
10,000
40,000
Administrative
20,000
20,000
20,000
10,000
80,000
30,000
30,000
30,000
20,000
1,20,000
Total
1,50,000
2,10,000
2,70,000
30,000
7,80,000
1,50,000

Quarter
Sales revenue
Less: Provision for
bad and doubtful
debts (0.02 x Sales)
Less: Sales discount
(0.8
x
previous
quarters sales)
Net sales
Less: Cost of goods
sold (@ Rs 40 per
unit)
Gross
margin
(unadjusted
Add:
Capacity
variance favourable
Less: Unfavourable
Gross
margin
(adjusted)
Less: Selling and
administrative costs
Earnings before taxes
Less: Taxes (0.50)
Earnings after taxes

Quarter
Opening balance
Add: Earnings after
taxes
Closing balance
Less: Dividends paid
Closing balance

Quarter
Opening Balance
Add: Credit sales
Total amount due
Less: Collection
(i)
During
discount
period
(0.50 x
prior
quarter
credit
sales)
(ii) After

Quarterly Selling and Administrative Expenses Budget

First
Second
Third
Fourth

Total

Rs 12,00,000

Rs 18,00,000

Rs 24,00,000

Rs 12,00,000

Rs 66,00,000

24,000

36,000

48,000

24,000

1,32,000

9,600
11,66,400

9,600
17,54,400

14,400
23,37,600

19,200
11,56,800

52,800
64,15,200

8,00,000

12,00,000

16,00,000

8,00,000

44,00,000

3,66,400

5,54,400

7,37,600

3,56,800

20,15,200

(25,320)

59,080

92,840

(25,320)

1,01,280

3,41,080

6,13,480

8,30,440

3,31,480

21,16,480

1,50,000

2,10,000

2,70,000

1,50,000

7,80,000

1,91,080
95,540

4,03,480
2,01,740

5,60,440
2,80,220

1,81,480
90,740

13,36,480
6,68,240

95,540

2,01,740

2,80,220

90,740

6,68,240

Quarterly Budgeted Statement of Retained Earnings

First
Second
Third
Fourth

Total

Rs 18,96,400

Rs 19,91,940

Rs 21,13,680

Rs 23,93,900

Rs 18,96,400

95,540
19,91,940

2,01,740
21,93,680

2,80,220
23,93,900

90,740
24,84,640

6,68,240
25,64,640

19,91,940

80,000
21,13,680

23,93,900

80,000
24,04,640

1,60,640
24,04,640

Quarterly Schedule Relating to Collection from Debtors

First
Second
Third
Fourth

Total

Rs 11,20,000
9,60,000
20,80,000

Rs 10,56,000
14,40,000
24,96,000

Rs 15,36,000
19,20,000
34,56,000

Rs 20,64,000
9,60,000
30,24,000

Rs 11,20,000
52,80,000
64,00,000

4,80,000

4,80,000

7,20,000

9,60,000

26,40,000

discount
period
(0.40 x
prior
quarter
credit
sales)
(0.075 x
2nd prior
quarter
credit
sales)
Written-off bad
debts (0.025 x
credit sales of 2nd
prior
quarter
credit sales)
Closing balance

Quarter
Opening Balance
Add: Credit purchases
(net of discount)
Total amount payable
Less: Payments:
(i)
During the
same
quarter
(0.90)
(ii) For
the
prior
quarter
(0.10)
Closing balance

Quarter
Cash inflows:
Cash sales (0.20)
Collection from debtors:
Credit sales subject to
discount (0.50)
Less: Discount (0.02)
Net amount
0.40 x prior quarter
Credit sales
0.075 x 2nd prior quarter
Sales
Total collection from
debtors
Total cash inflows
Cash outflows:
Payment to creditors
Direct labour
Variable overheads
Fixed overheads
Selling
and
administrative overheads

3,84,000

3,84,000

5,76,000

7,68,000

21,12,000

1,20,000

72,000

72,000

1,08,000

3,72,000

40,000
10,56,000

24,000
15,36,000

24,000
20,64,000

36,000
11,52,000

1,24,000
11,52,000

Quarterly Schedule Relating to Payment to Creditors

First
Second
Third
Fourth

Total

Rs 44,000

Rs 54,546.80

Rs 71,579.20

Rs 68,560.80

Rs 44,000

5,45,468
5,89,468

7,15,792.00
7,70,338.80

6,85,608.00
7,57,187.20

4,58,248.00
5,26,808.80

24,05,116
24,49,116

4,90,921.20

6,44,212.80

6,17,047.20

4,12,423.20

21,64,604.40

44,000.00
54,546.80

54,546.80
71,579.20

71,579.20
68,568.80

68,560.80
45,824.80

2,38,686.80
45,824.80

Quarterly Cash Budget

First
Second

Third

Fourth

Total

Rs 2,40,000

Rs 3,60,000

Rs 4,80,000

Rs 2,40,000

Rs 13,20,000

4,80,000
9,600
4,70,400

4,80,000
9,600
4,70,400

7,20,000
14,400
7,05,600

9,60,000
19,200
9,40,800

26,40,000
52,800
25,87,200

3,84,000
1,20,000

3,84,000
72,000

5,76,000
72,000

7,68,000
1,08,000

21,12,000
3,72,000

9,74,400
12,14,400

9,26,400
12,86,400

13,53,600
18,33,600

18,16,800
20,56,800

50,71,200
63,91,200

Rs 5,34,921.20
88,000
1,32,000
1,61,000

Rs 6,98,759.60
1,28,000
1,92,000
1,61,000

Rs 6,88,626.40
1,44,000
2,16,000
1,61,000

Rs 4,80,984.00
88,000
1,32,000
1,61,000

Rs 24,03,291.20
4,48,000.00
6,72,000.00
6,44,000.00

1,50,000

2,10,000

2,70,000

1,50,000

7,80,000.00

Income taxes
Dividends
Equipment
Total cash outflows
Net cash inflows
Opening balance
Closing balance

Liabilities
Share capital
Retained
earnings
Creditors
Taxes payable

74,000
11,39,921.20
74,478.80
2,40,000
3,14,478.80

95,540
80,000
15,65,299.60
(2,78,899.60)
3,14,478.80
35,579.20

2,01,740
16,81,366.40
1,52,233.60
35,579.20
1,87,812.80

2,80,220
80,000
6,00,000
19,72,204
84,596.00
1,87,812.80
2,72,408.80

6,51,500.00
1,60,000.00
6,00,000.00
63,58,791.20
32,408.80
2,40,000.00
2,72,408.80

Budgeted Balance Sheet as at March 31, Next Year

Amount
Assets
Amount
Rs 31,77,428 Fixed assets
Rs 54,00,000
Less:
24,04,640 Accumulated
45,824.80 depreciation
14,00,000
Rs 40,00,000
90,740 Inventories:
Direct material
1,26,224
(Material A,
9,200 x Rs
5.88)
(Material B,
9,200 x Rs
7.84)
Finished goods
(6,000 x Rs 40)
2,40,000
3,66,224
Debtors
11,52,000
Less:
Allowances for
bad debts (Rs
64,000 + Rs
1,32,000 Rs
1.24.000)
72,000
10,80,000
____________ Cash
2,72,408.80
57,18,632.80
57,18,632.80

P.19.9 The standard labour, and the actual labour employment in a week for a job are as
under:
Particulars
Skilled SemiUnskilled workers
workers skilled
workers
(A) Standard number of workers in
32
12
6
the gang
(B) Standard wage rate per hour
Rs 3
Rs 2
Rs 1
(C) Actual number of workers
28
18
4
employed in the gang during the
week
(D) Actual wage rate per hour
4
3
2

During the 40-hours working weak, the gang produced 1,800 standard labour-hours of
work. Calculate the: (1) Labour efficiency variance: (2) Labour mix variance; (3) Rate of
wages variance; and (4) Total labour cost variance.

SOLUTION
Category of
workers

Number of
workers

Standard
Total hours

Number of
hours

Skilled
Semi-skilled
Unskilled

32
12
6

40
40
40

Skilled
Semi-skilled
Unskilled

28
18
4

40
40
40

1,280
480
240
2,000
Actual
1,120
720
160
2,000

Wage rate

Total wages
Rs 3
2
1
2.52

Rs 3,840
960
240
5,040

4
3
12
3.48

4,480
2,160
320
6,960

1.

Labour efficiency variance: (Standard labour-hours-Actual labour-hours) x

Standard weighted average wage rate = (1,800 2,000) x Rs 2.52 = Rs 504
(adverse)
2.
Labour mix variance: (Standard mix of actual hours worked Actual mix of
actual hours) x Standard wage rate
Since standard total hours and actual total hours are the same (2,000 hours),
there is no need to calculate a revised standard mix of actual hours.
Accordingly,
Skilled workers: (1,280 1,120) x Rs 3 = Rs 480 (favourable)
Semi-skilled workers: (480 720) x Rs 2 = 480 (adverse)
Unskilled workers (240 160) x Re 1 =
80 (favourable)
Total labour mix variance
80 (favourable
3.
Rate of wages variance: (SR AR) x AH
Skilled workers: (Rs 3 - Rs 4) x 1,120 = Rs 1,120 (adverse)
Semi-skilled workers: (Rs 2 - Rs 3) x 720 = 720 (adverse)
Unskilled workers (Rs 1 Rs 2) x 160
= 160 (adverse)
Total labour rate variance
2,000 (adverse)
4.
Total labour cost variance: (Total standard labour cost at standard hours Actual
labour cost at actual hours)
Standard labour cost = (Standard hours x Standard weighted average wage rate)
= (1,800 x Rs 2.52) = Rs 4,536 Rs 6,960 = Rs 2,424 (adverse)
P.19.12 From the following data of ABC Ltd relating to the budgeted and actual
performance for the month of March, compute direct material and direct labour cost
variances.
Budged data for March:
Units to be manufactured
1,50,000
Units of direct material required (based on standard rates)
4,95,000

Planned purchase for raw material (Units)

Average unit cost of direct material (Rs)
Direct labour-hours per unit of finished goods
Total direct labour costs (Rs)
Actual data at the end of March:
Units actually manufactured
Direct material costs (purchase costs based on units actually issued)
Direct material costs (purchase costs based on units actually issued)
Average unit costs of direct material (Rs)
Total direct labour-hours for March
Total direct labour costs for March (Rs)
SOLUTION
(i)
Material Cost Variance
Actual material costs
Less: Standard material costs:
Units actually manufactured
(x) Direct raw material per unit (Rs 4,95,000/
Rs 1,50,000
Total units of raw material
(x) Standard unit cost of direct material

5,40,000
8
0.75
29,92,500
1,60,000
43,41,900
45,10,000
8.20
1,25,000
33,75,000

43,41,900
1,60,000
X 3.3
5,28,000
X Rs 8

42,24,000
1,17,900
(unfavorable)
(a) Material price variance (SR AR) x AQ = (Rs 8 Rs 8.20) x 5,29,500 units* =
Rs 1,05,900 (unfavourable)
5,29,500 units = Rs 43,41,900/ Rs 8.20 per unit
(b) Material usage variance (SQ AQ) x AR = (5,28,000 5,29,500) x Rs 8 = Rs
12,000 (unfavourable)
(ii)
Labour Cost Variance
Actual labour costs
Rs 33,75,000
Less: Standard labour costs:
Units actually manufactured
1,60,000
(x) Direct labour cost per unit
XRs 19.96
31,92,000
1,83,000
(unfavorable)
(a) Labour rate variance (SR AR) x AH = (Rs 26,60@ x Rs 1,25,000) Rs
33,75,000 = Rs 50,000 (unfavourable)
(b) Labour efficiency variance (SH AH) x SR per hour = (1,60,000 x 0.75 = Rs
1,20,000 hours 1,25,000) x Rs 26.6 = Rs 1,33,000 (unfavourable)
P.21.10 The Royal Industries Ltd has two divisions. A and B, Division A manufactures
product X which it sells in an outside market as well as to division B, which processes it
to manufacture Z. The manager of division B has expressed the opinion that the transfer
price is too high.

The two divisional managers are about to enter into discussions to resolve the
conflict, and the manager of division A wants you to supply him with some information
prior to the discussions.
Division A has been selling 40,000 units to outsiders and 10,000 units to division
B, all at Rs 20 per unit. It is not anticipated that these demands will change. The variable
cost is Rs 12 per unit and the fixed costs are Rs 2 lakh.
The manager of division A anticipates that division B will want a transfer price
of Rs 18. If he does not sell to division B, Rs 30,000 of fixed costs and Rs 1,75,000 of
assets can be avoided. The manager of division A would have no control over the
proceeds from the sale of the assets and is judged primarily on his rate of return.
(a) Should the manager of division A transfer its products at Rs 18 to division B?
(b) What is the lowest price that the division A should accept? Support your decision
with detailed calculations.
SOLUTION
(a)
Comparative Statement of Profit of Division A
Alternative situations
Particulars
Sell at Rs 20
Transfer at Rs 18
Do not transfer
Sales revenue:
Market sales (40,000 units
x Rs 20)
Rs 8,00,000
Rs 8,00,000
Rs 8,00,000
Transfer to division B
(10,000 units)
2,00,000
1,80,000
Total (a)
10,00,000
9,80,000
8,00,000
Variable costs (Rs 12 per
unit)
6,00,000
6,00,000
4,80,000
Fixed costs
2,00,000
2,00,000
1,70,000
Total (b)
8,00,000
8,00,000
6,50,000
Total profit (a b)
2,00,000
1,80,000
1,50,000
Total assets
8,00,000
8,00,000
6,25,000
SROI (per cent)
25
22.5
24
The manager of division A should not agree to sell at Rs 18 per unit as it lowers
down its rate of return-the index of his evaluation.
(b) The lowest transfer price acceptable to division A is o ne which maintains its rate
of return of 24 per cent the possible SROI without selling to division B):
Totalsales revenue Total cos t
Rs8,00,000 10,000X Rs8,00,000

0.24
totalassets
Rs8,00,000

Where X = transfer price per unit

10,000 X = Rs 1,92,000
X = Rs 19.20
The lowest transfer price acceptable to division A is Rs 19.20 per unit.

P.21.11 The AB Ltd has two divisions, X and Y. One of the parts produced by division X
is used in the manufacture of a product that is assembled at division Y. The part is not
unique and there is a readily defined market such that X can sell outside the firm and Y
can buy from outside. The following information is descriptive of the normal
expectations of division X:
Capacity to produce the part (units)
1,25,000
External sales at Rs 100 per (units)
1,00,000
Transfer to division Y (units)
25,000
Costs:
Variable manufacturing cost per unit
Rs 84
Variable selling costs (on external sales only but not incurred on internal
transfers)
2
Fixed manufacturing cost (based on 1,25,000 units)
6
Fixed selling cost (based on 1,00,000 units)
1
The division Y presents the following data on the assumption of a volume of 25,000 units
(one part is needed for each unit of its own production):
Variable manufacturing cost per unit (exclusive of transfer price or outside
Rs 100
purchase price)
Variable selling expenses per unit
6
Fixed manufacturing cost
10
Fixed selling expenses
4
Selling price of finished product
240
REQUIRED:
(i) If division X could sell 1,25,000 units at Rs 100 each in the outside market, what
transfer price would the company management prefer in order to provide
proper motivation to division Y?
(ii) As management accountant, would you advise division Y to buy at the transfer
price determined in part (i)?
(iii) Assume the situation and the transfer price determined in part (i). if the selling
price dropped to Rs 200, should Y buy at that price? Would this be desirable
from the point of the firm? Why?
(iv) Assume that division Xs product did not have an outside demand in excess of
1,00,000 units and its total fixed manufacturing cost could be reduced by 10
per cent, if the volume of production were reduced by 10 per cent, if the
volume of production were reduced to 1,00,000 units, what is the appropriate
transfer price?
(v) Suppose that X divisions maximum outside demand is 1,10,000 units Rs 100,
and there is no other usage for the capacity. What transfer price(s) should the
company management prefer?
(vi) Suppose the unit selling price of Ys product is Rs 180; one of its customers is
also a customer of division X; division Y refuses to buy the part from the
outside market at Rs 100 since the selling price of Rs 180 would not be high
enough to even cover the variable costs. If division X does not lower the
transfer price, division Y will not sell to this customer who, in turn, will

probably cancel the usual order of 50,000 units to division X; there is no other
demand for the product and no other usage of Xs capacity; fixed costs would
not change at either division. What is the lowest transfer price that the
division X would be well advised to accept? Support your recommendation
with computations.

SOLUTION
(i) Determination of Transfer Price
(a)Variable manufacturing cost of division X
(b) Opportunity cost (in terms of contribution foregone by
transfer to division Y):
Selling price
Less total variable costs to make and sell (Rs 84 + Rs 2)
Transfer price

Rs 100
86

14
98

(ii) Statement of Contribution Per Unit-Division Y

Selling price
Rs 240
Less variable costs:
Manufacturing cost (division Y)
Rs 100
Transfer price from division X
98
Variable selling expenses
6
204
Contribution margin per unit
36
Yes, division Y is advised to buy from division X
(iii) At Rs 200 selling price per unit, division Y will not be able to earn a positive
contribution:
Selling price
Rs 200
Less variable costs:
204
Negative contribution
(4)
No, division Y should not buy at that price. Yes, it would be desirable from the
standpoint of the firm also due to higher contribution on external sales:
Comparative Income Statement of the Firm
Selling price per unit
Out-of pocket-costs;
Division X
Division Y
Contribution margin
(iv) Appropriate Transfer Price Per Unit

Rs 100

Rs 200

86
14

84
106
10

Variable cost
Rs 84
Plus opportunity cost (in terms of reduction of fixed
manufacturing cost by 10 per cent)

(see working note 1)

(v) Transfer Price
Units
15,000 units (working note 2)
10,000 units (part ii)

3
87
Transfers Price
Rs 84
98

(vi)
Determination of Transfer Price
Variable cost of production of 25,000 units (25,000 units x
Rs 84)
Less opportunity cost of lost sales (working note 3)
Lowest transfer price of 25,000 units
Transfer price per unit (Rs 14,00,000 / 25,000 units)
WORKING NOTES
1. Present cost of manufacturing (1,25,000 x Rs 6)
Less budgeted costs (0.90 x Rs 7,50,000)
Fixed cost of manufacturing 25,000 units
Opportunity cost per unit (Rs 75,000 / 25,000 units)
2. For 15,000 units [1,25,000 units capacity (1,10,000
units market can absorb)], the opportunity cost is
zero. The transfer price should, therefore, be equal to
the variable cost, that is, Rs 84.
3. Opportunity cost of losing sale of 50,000 units
Sales revenues (50,000 units x Rs 100)
Less variable manufacturing and selling costs (50,000
units x Rs 86)

Rs 21.00.000
7,00,000
14,00,000
56
Rs 7,50,000
6,75,000
75,000
3

Rs 50,00,000
43,00,000
7,00,000