Course: Cost Accounting (462)

Semester: Spring, 2020

ASSIGNMENT No. 2
Q. 1 Describe the terms ordering level, minimum level, maximum level, danger level and lead time with
regard to maintenance of material and supplies inventories in a manufacturing industry.
Stock Level: Type # 1. Minimum Level:
This represents the quantity which must be maintained in hand at all times. If stocks are less than the minimum
level, then the work will stop due to shortage of materials.
Following factors are taken into account while deciding minimum stock level:
(i) Lead Time:
A purchasing firm requires some time to process the order and time is also required by the supplier/vendor to
execute the order. The time taken in processing the order and then executing it is known as lead time. It is
essential to maintain some inventory during this period to meet production requirements.
(ii) Rate of Consumption:
It is the average consumption of materials items in the industry. The rate of consumption will be decided on the
basis of past experience and production plans.
(iii) Nature of Material:
The nature of material also affects the minimum level. If a material is required only against special orders of the
customer then minimum stock will not be required for such materials. Wheldon has given the following formula
for calculating minimum stock level: Minimum stock Level = Re-ordering Level – (Normal Consumption x
Normal Reorder Period)
(iv) Re-ordering Level:
When the quantity of materials reaches a certain level then fresh order is sent to procure materials again. The
order is sent before the materials reach minimum stock level.
Reordering level is fixed between minimum level and maximum level. The rate of consumption, number of
days required to replenish the stocks, and maximum quantity of materials required on any day are taken into
consideration while fixing reordering level.
Re-ordering level is fixed with following formula:
Reordering Level = Maximum Consumption Rate x Maximum Reorder period.
Stock Level: Type # 2. Maximum Level:
It is the quantity of materials beyond which a firm should not exceed its stocks. If the quantity exceeds
maximum level limit then it will be termed as overstocking. A firm avoids overstocking because it will result in
high material costs. Overstocking will lead to the requirement of more capital, more space for storing the
materials, and more charges of losses from obsolescence.
Maximum stock level will depend upon the following factors:
1. The availability of capital for the purchase of materials in the firm.
2. The maximum requirements of materials at any point of time.

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 Course: Cost Accounting (462)
Semester: Spring, 2020
3. The availability of space for storing the materials as inventory.
4. The rate of consumption of materials during lead time.
5. The cost of maintaining the stores.
6. The possibility of fluctuations in prices of various materials.
7. The nature of materials. If the materials are perishable in nature, then they cannot be stored for long periods.
8. Availability of materials. If the materials are available only during seasons then they will have to be stored
for the future period.
9. Restrictions imposed by the government. Sometimes, government fixes the maximum quantity of materials
which a concern can store. The limit fixed by the government will become the deciding factor and maximum
level cannot be fixed more than that limit.
10. The possibility of changes in fashions will also affect the maximum level.
Wheldon has suggested the following formula for calculating maximum stock level:
Maximum Stock Level = Reordering Level + Reordering Quantity – (Minimum Consumption x Minimum
Reordering period)
Stock Level: Type # 3. Danger Level:
It is the level below which stocks should not fall in any case. If danger level approaches then immediate steps
should taken to replenish the stocks even if more cost is incurred in arranging the materials. Danger level can be
determined with the following formula:
Danger Level = Average Consumption x Maximum reorder period for emergency purchases.
Stock Level: Type # 4. Average Stock Level:
The Average stock level is calculated such as:
Average Stock Level = Minimum stock Level + 1/2 of Reorder Quantity.
Example:
From the following information, calculate minimum stock level, maximum stock level and re-ordering
level:
(i) Maximum Consumption = 200 units per day
(ii) Minimum Consumption = 120 units per day
(ii) Normal Consumption =160 units per day
(iv) Reorder period = 10-15 days
(v) Reorder quantity = 1,600 units
(vi) Normal reorder period = 10 days.
Solution:
Reordering Level = Maximum Consumption x Maximum Reorder period
= 200 units X 15 = 3,000 units Minimum Stock Value = Reordering Level – (Normal Consumption x Nominal
Reordering Period)

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 Course: Cost Accounting (462)
Semester: Spring, 2020
= 3,000 – (160 X 10) = 3,000 – 1,600 = 1,400 units
Maximum Stock Level = Reordering Level + Reorder Quantity – (Minimum Consumption x Reorder period) =
3,000 + 1,600 – (120 X 10) = 3,000 + 1,600 – 1,200 = 2,400 units.
The three other factors must also be explained very carefully.
Q. 2 During the month of November, Hassan Glass Factory conducted the following transactions for the
glass materials:-
Date Transactions
01 Balance of 400 units brought forward at Rs. 50 each.
03 Received 300 units at Rs. 55 each in the stores.
07 Issued 100 units to the factory for production.
15 Received another lot of 200 units at Rs. 52 each in the stores.
18 Issued 150 units to the factory for production.
21 Issued 300 more units to the factory for production.
25 Received 150 units of material at Rs. 60 each.
29 Issued 200 more units to the production.
The company is using perpetual inventory system for proper controls.
Required:- Prepare Store Ledger Card using each of the following methods of inventory costing :-
Balance = 400 * 50 = 20000
Received Unit = 300 * 55 = 16500
Issue Unit = 100
Received Unit = 200 * 52 = 10400
Issue Unit = 150
Received Unit = 150 * 60 = 9000
Issue Unit = 200
A) First in First Out (FIFO)
Cost of unit = 100*55 = 5500
Remaining = (200*55) + (200*52) + (150*60)
= 24900
B) Last in First Out (LIFO)
Cost of unit = 75*60 = 4500
Remaining = (150*55) + (200*52) + (150*60)
= 27650
C) Moving Average
Cost of unit = 35900 divided by 650
= 55.23

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 Course: Cost Accounting (462)
Semester: Spring, 2020
Q. 3 A pharmaceutical company is considering introducing Halsey Premium or Rowan (Plan of
incentives scheme for their employees. The standard time of production is 10 hours and the Hourly
rate is Rs. 100. In order to carry out a comparative study that which of the two incentive plans is
cost effective for payment of wages to workers, the company estimates that the time taken for
production of a Batch may be 9 Hours, 8 Hours and 7 Hours.
Required: Advise the company for adopting suitable incentive plan supported by workings and total
labor cost per Hour under each incentive plan of Halsey Premium and Rowan.
Standard Time = S = 10 hours
Time Taken = T = 9 , 8 and 7 hour
Rate = R = 100 per hour
Under Halsey
At 9 Hour
Total Earning = (T*R) + 10%(S-T)R
= 900 + 10%(10-9)100
=910
At 8 Hour
Total Earning = (T*R) + 20%(S-T)R
= 800 + 20%(10-8)100
= 840
At 7 Hour
Total Earning = (T*R) + 30%(S-T)R
= 700 + 30%(10-7)100
= 790
Total Earning = 910 + 840 + 790
= 2540
Effective Rate = Total Earning / Actual Time = 2540 / 24
= 105.83
Q. 4 What are the methods for disposition of under and over applied factory overheads? Explain with
necessary journal entries.
The over or under-applied manufacturing overhead is defined as the difference between manufacturing
overhead cost applied to work in process and manufacturing overhead cost actually incurred during a period.
If the manufacturing overhead cost applied to work in process is more than the manufacturing overhead cost
actually incurred during a period, the difference is known as over-applied manufacturing overhead. On the other
hand; if the manufacturing overhead cost applied to work in process is less than the manufacturing overhead
cost actually incurred during a period,  the difference is known as under-applied manufacturing overhead.

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 Course: Cost Accounting (462)
Semester: Spring, 2020

The occurrence of over or under-applied overhead is normal in manufacturing businesses because overhead is
applied to work in process using a predetermined overhead rate. A predetermined overhead rate is computed at
the beginning of the period using estimated information and is used to apply manufacturing overhead cost
throughout the period.
Recording actual and applied overhead cost in manufacturing overhead account:
Over or under-applied manufacturing overhead is actually the debit or credit balance of manufacturing overhead
account (also known as factory overhead account).
Actual manufacturing overhead costs are debited and applied manufacturing overhead costs are credited to
manufacturing overhead account. Actual overhead costs are debited as they are incurred and applied overhead
costs are credited as they are applied to work in process. At the end of a period, if manufacturing overhead
account shows a debit balance, it means the overhead is under-applied.  On the other hand; if it shows a credit
balance, it means the overhead is over-applied. For further explanation of the concept, consider the following
example:

The debit or credit balance in manufacturing overhead account at the end of a month is carried forward to the
next month until the end of a particular period – usually one year.
Disposition of over or under-applied manufacturing overhead:
At the end of the year, the balance in manufacturing overhead account (over or under-applied manufacturing
overhead) is disposed off by either allocating it among work in process, finished goods and cost of goods
sold accounts or transferring the entire amount to cost of goods sold account. These two methods have been
discussed below:

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 Course: Cost Accounting (462)
Semester: Spring, 2020
Allocation among work in process, finished goods and cost of goods sold account:
Under this method, the amount of over or under-applied overhead is disposed off by allocating it among work in
process, finished goods and cost of goods sold accounts on the basis of overhead applied in each of the accounts
during the period. The following journal entry is made to dispose off an over or under-applied overhead:
When overhead is under-applied:

When overhead is over-applied:

This method is more accurate than second method. The only disadvantage of this method is that it is more time
consuming.
Transferring the entire amount of over or under-applied to cost of goods sold:
Under this method the entire amount of over or under applied overhead is transferred to cost of goods sold. The
following entry is made for this purpose:
When overhead is under-applied:

When overhead is over-applied:

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 Course: Cost Accounting (462)
Semester: Spring, 2020
This method is not as accurate as first method. Companies use this method because it is less time consuming
and easy to use.
Example:
During the year 2012, Beta company started two jobs – job A and job B . Job A consisted of 1,000 units and job
B consisted of 500 units. At the end of the year 2012, job A was completed but job B was in process. The
information about manufacturing overhead cost applied to job A and B was as follows:

The actual manufacturing overhead cost incurred by the company during 2012 was $108,000. Out of 1,000 units
in job A, 750 units had been sold before the end of 2012.
Required: Calculate over or under applied manufacturing overhead and make journal entries required to
dispose off over or under applied manufacturing overhead assuming:
1. It is disposed off by allocating between inventory and cost of goods sold accounts.
2. It is disposed off by transferring to cost of goods sold.
Solution:
Calculation of over or under-applied manufacturing overhead:
In our example, manufacturing overhead is under-applied because actual overhead is more than applied
overhead. The under-applied overhead has been calculated below:
Under-applied manufacturing overhead =  Total manufacturing overhead cost actually incurred – Total
manufacturing overhead applied to work in process
= $108,000 – $100,000
= $8,000
Journal entries to dispose off under-applied overhead:
(i). Allocation of under-applied overhead among work in process, finished goods, and cost of goods sold
accounts:

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 Course: Cost Accounting (462)
Semester: Spring, 2020

(ii). Transfer of entire under-applied overhead to cost of goods sold account:

Q. 5 The Oxford Garments Industries is comprising four departments. Cutting, Stitching and Finishing
are the Production departments whereas the Procurement is the Servicing Department. Actual
overhead costs for June, 2014 are as under:-
Rent Rs. 200,000 Supervision Rs. 30,000
Repair & maintenance Rs. 12,000 Insurance Rs. 10,000
Depreciation of Plant Rs. 90,000 Lighting Rs. 12,000
Power consumption Rs. 18,000
The following further data is also available in respect of the four departments:-
Particulars Cutting Stitching Finishing Procurement
Square foot
area 150 110 90 50
occupied
Number of
24 16 12 8
workers
Total Wages Rs. 240,000 Rs. 192,000 Rs. 96,000 Rs. 80000
Value of
Rs. 200,000 Rs. 600,000 Rs. 100,000
Plant
Value of
Rs. 150,000 Rs. 90,000 Rs. 60,000
Stock
Required:
Apportion the overhead costs over various departments on most equitable basis and prepare the
overheads distribution statement.

Procurement
Particulars Cutting (P1) Stitching (P2) Finishing (P3)
(X)

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 Course: Cost Accounting (462)
Semester: Spring, 2020
Square foot
area 150 110 90 50
occupied
Number of
24 16 12 8
workers
Total Wages Rs. 240,000 Rs. 192,000 Rs. 96,000 Rs. 80000
Value of
Rs. 200,000 Rs. 600,000 Rs. 100,000
Plant
Value of
Rs. 150,000 Rs. 90,000 Rs. 60,000
Stock

Item Appotionment Total Production Departments Service

Amount Department
P1 P2 P3 X
1. Rent 25 Paisa per 200000 75000 55000 45000 25000
meter
2. Repaire & 1 paisa per 12000 4800 3200 2400 1600
Mantaince rupee
3. Depreciation 0.75 paisa per 90000 36000 24000 18000 12000
rupee
4. Light 3 paisa pr 12000 4800 3200 2400 1600
square meter
5. Power Rs. 15 per 18000 7200 4800 3600 2400
H.P
6. Supervision Rs. 30 per 30000 12000 8000 6000 4000
employee
7. Insurance 1/60 of value 10000 399.84 2666.65 1999.92 1333.28
stock