UNIT I

1. What are the advantages and weakness of job order cost accounting?

Merits of job costing:

• It provides detailed analysis of cost of materials, labour and overheads. The costs are available
anytime they are required. The management can know the trend of costs and can control the
operations more effectively.

• It helps in distinguishing between the profitable and unprofitable jobs. • It provides a basis for
estimating costs for future quotations.

• It helps in improving the future production planning.

• Adoption of predetermined overhead rates in job costing necessity application of budgetary control
with its advantages. Cost data from job costing is useful in the preparation of future budgets.

• It helps the management in fixing the selling prices of special contracts and also cost plus contracts.

• The systematic costing records maintained for each job provide a reliable database for statistical
trend analysis for costs over a period of time.

Weakness of job costing

• The method needs an excellent system of production control, material control and labour
control systems which may not be existing in most of the small forms.

• It involves a lot of clerical work making it a relatively expensive method.

• Costs of different Jobs or not comparable since each job has its own features.

• Absorption of overheads on the basis of pre determined rates is necessary which makes
budgeting a perquisites. The form may not be practicing budgeting system.

• Due to extensive clerical work involved there is chance for mistakes.

• Job costing assistants costs only after the completion of jobs. So, for control purpose it is
not much use unless it is combined with standard costing system or estimating costing.

2. Compute the economic batch quantity for a company using batch costing with the
following information.
Actual demand for the components: 4000 units
Setting up and order processing costs: Rs.50
Cost of manufacturing one unit: Rs.100
Rate of interest p.a. 10%

3. Compute the economic batch quantity for a company using batch costing with the
following information.

Actual demand for the components: 24000

Set-up cost per batch: Rs.120
Carrying cost per unit of production Re.0.36

4. The information given below has been taken from the cost records of a factory in
respect of job number 707:
Direct material Rs. 4010
Wages details :
Department -A :60 hours @Rs. 3 per hour
-B : 40 hours @ Rs. 2 per hour
-C :20 hours @Rs. 5 per hours
The variables overheads are as follows -:
Department -A: Rs. 5000 for 5000 hours
-B : Rs. 3000 for 1500 hours
 - C : Rs. 2000 for 500 hours
Solution:
Cost sheet of job number 707
Particulars Rs. Rs.

Direct Materials
4010
Wages : Department A : 60XRs. 3
180
Department B : 40XRs. 2
80
Department C : 20XRs. 5
100 360
Prime cost
4370

Overheads
Variables (1) : Department A :60XRs. 1
60
Department B : 40XRs. 2
80
Department C : 20XRs. 4
80 220
Fixed (2) : 120 hr. @ Rs. 2 per hours 4590
240
Profit (331/3% on cost or 25% on selling 4830
price) 1610
Selling price 6440

5. The annual demand of a product is 24000 units. It is produced in batches and largest
size of a single batch is 6000 units. After each batch is completed, the set up cost is
Rs.750 the annual carrying cost is Rs.2.25 per unit. Assume average inventory as one-
half of the number of units made in each batch. Selecting 4,6,8,12 and 24 batches per
annum, determine annual casts of each and state the optimum number of batches to
minimize the total costs.
6. The demand of an item is uniform at a rate of 25 units p.m. The set up cost is Rs. 30
each time production is made. The production cost is Rs 3 per item and the
inventory carrying cost is 50paise per unit p.m. If the shortage cost is Rs.3 per item
p.m. determine how often to make a production run and of what size? Also calculate
reorder level.

UNIT II
1. Explain the characteristics of contract costing. I
i. The cost unit is a specific contract.
ii. Each contract is performed over a significantly long period of time,
sometimes stretching over two or more accounting periods.
iii. The work is done usually at the site chosen by the customer, as per his
specifications and instructions.
iv. Payment is usually received in different stages of completion of the work.
v. Most of the cost involved are direct in nature and can be allocated to the
particular contract.
vi. Overheads are comparatively insignificant and may be constitute the
administrative cost of the main office and stores.
vii. Cost control becomes difficult due to the size of the work and site.
Pilferages and thefts of materials and tools are common.
viii. Plant, equipment and materials may be constantly transported and shifted
between central stores, contract site and other contracts.
 2. Seema & Co. undertook a contract for construction of a private house. Contract
price was Rs.40,00,000.The following were the details:
Particulars Rs.
Materials sent to contract site Labour : Skilled 16,00,000
6,00,000
Unskilled 4,00,000 10,00,000
Subcontracts for Plumbing and Electricity 4,00,000
Sundry Expenses 2,00,000
Closing Stock of materials at site 2,00,000
Prepare contract account and determine the profit or loss
Solution:
Seema& Co. Contract Account
Particulars Rs. Particulars Rs.
To Materials (sent) 16,00,000 By Closing stock 1,00,000
To Labour: of Material
Skilled 6,00,000 By Contractee’s 40,00,000
Unskilled 4,00,000 Account (contract
To Subcontracts for Plumbing & 4,00,000 price )
Electricity
To sundry Expenses 2,00,000
To P&L A/c (Profit) (Bal.Fig 9,00,000
41,00,000 41,00,000

3. The following are the expenses of Balaji & Co., in respect of a contract which
commenced on 1st January 2010:
Particulars Rs.
Materials purchased 50,000
Materials on hand Direct 2,500
wages 75,000
Plant issued 25,000
Direct Expenses 40,000
The contract price was Rs.7, 50,000 and the same was duly received when the contract was
completed in August 2010.Charge indirect expenses at 15% on wages; provide Rs.5,000 for
depreciation on plant and prepare the contract account and the contractee’s Account.
Solution:
Balaji&Co.,-Contract Ledger
Contract A/c
Particulars Rs. Particulars Rs.
To material purchased 50,000 By Material on hand 2,500
To Direct Wages 75,000 By Contractee’s A/c 7,50,000
To Direct expenses 40,000 (contract price)
To Indirect expenses (15% 11,250
on wages)
To Depreciation on plant 5,000
To P&L A/c (Profit – 5,71,250
Bal.Fig
7,52,500 7,52,500
Contractee’s A/c
Particulars Rs. Particulars Rs.
To contract A/c 7,50,000 By bank 7,50,000
7,50,000 7,50,000

4. What is meant by cost plus contract? Explain the advantages and disadvantages of
cost plus contract?
A) Estimating the costs exactly may prove difficult in some cases. Violent
fluctuations in material prices and unexpected changes in wage rate may make
quoting for a contract a hazardous task .The contractor may desire to make a
specific rate of profit. In such circumstances, cost plus contracts are generally
accepted.
Advantages of cost plus contract
(a) The contractor is sure of making desired profit, irrespective of cost
fluctuations.
(b) It insures the contractor from price fluctuation.
(c) The contractee knows definitely the profit to be earned by the contractor.
(d) Contractee pays on the basis of cost rather than arbitrary price quoted.
Disadvantages of cost plus contract
(a) There is premium or incentive for inefficiently because the contractor has no
incentive to control or reduce costs
(b) The contractor has the scope to inflate his costs and consequently his profits
also.
(c) The burden of justifying each cost falls on the shoulders of the contractor.
(d) In contractee’s anxiety to minimise the costs, quality may be sacrificed.
Generally, cost plus contracts are more popular with government organisations.
5. Difference between Job costing and contract costing.
Both methods are variation of specific order costing. They involve orders
accepted from specific customers and the job or contract becomes the cost unit.
However, they differ from each other in following aspects.
(a) Size: Jobs are smaller and contracts are bigger in monetary terms and also in
physical aspects.
(b) Duration: Jobs takeup lesser time and usually completed within one
accounting periods. Contracts take longer period and may even stretch over
several periods
(c) Site: Jobs are normally performed at the contractor’s shop or factory or place.
Contracts are executed at the contractee’s site.
(d) Payment: Selling price of a job is collected on delivery .For contracts payment
is received in several instalments.
(e) Work certification: Jobs are usually finished without much interference or
inspection from the customer. Contracts are routinely inspected by contractee’s
representatives and work performance is accepted on the basis of their
certification.
(f) Investment: The contractor has to invest huge amounts in plant, materials, etc.,
initially for contracts, compared to jobs.
(g) Nature of costs: Elaborate system of overhead absorption is followed in job
costing because the indirect expenses constitute an important portion of the cost.
In contract costing, most of the costs are direct and overheads may constitute a
small portion of the total cost.
 (h) Profit recognition: Jobs are generally completed in short period and the profit
or loss is fully transferred to profit &loss A/c. Contracts usually spill over to the
subsequent accounting years. So the problem of recognising profit on incomplete
contract arises. A portion is credited to P&L A/c and the balance is kept in
reserve.
6. Prepare a Contract Account:
Material Rs.3, 36,000
Wages Rs.3, 40,000
Plant purchased Rs.60, 000
Work certified Rs.7, 50,000
Material at site Rs.40, 000
Solution:
Particulars Rs. Particulars Rs.
To Material 3,36,000 By Material at site 40,000
To Wages 3,40,000 By Work is progress
To Notional Profit 1,14000 Work Certified 7,50,000
c/d (B/f)
7,90,000 7,90,000

UNIT III

1. What is unit costing? Explain Accumulation of cost?

Ans: Unit or single or output costing is the method of costing employed:
(a) Where production is carried on in a single process or operation
(b) When production is uniform and continuous.
(c) When the cost units are physical and natural
(d) The output units are identical or a few grades of similar articles.
Unit costing is usually employed by organisations producing a single product on a large scale
by a continuous process. The output is identical and can be expressed in convenient measures
like kgs., tons, units, etc.
Examples of industries adopting single or output costing are sugar, cement, brick making,
iron casting, coal mines, paper making, stone and slate quarries, etc. For consumer durables
like Radios, T.Vs, Cameras also the method can be applied if output of each model is on a
large scale.
Accumulation of Costs
1. Costs are accumulated and analysed under the usual elements of cost and each
element may be divided with the number of units to ascertain cost by each element.
Elaborate costing records are not required because the work of allocation and
apportionment is minimal.
Materials: Most of the materials used are direct in nature and are charged to the production.
Indirect materials for maintenance and office may be separately collected under’ standing
order numbers’. Any normal loss of material increases the issue price of the remaining good
material units. Any abnormal loss has to be charged to the Profit & Loss A/c directly.
Labour: Pay roll and time cards are used to identify the direct and indirect labour for each
cost centre. Finally the direct wages become a part of prime cost and the indirect labour is
debited to the respective overhead accounts.
Direct Expenses: Expenses like royalty, hire of special equipment and machines, etc. Are
separately noted and directly charged to the output as a part of the prime cost.
Overheads: They are usually classified on activity basis into factory, office, selling and
distribution. Each category of indirect expenses are separately accumulated and analysed.
Pre-determined rates are commonly set to absorb overheads. Any under or over absorption
can be appropriately dealt with.
2. From the following information ,prepare a monthly cost sheet showing cost and profit
per 1,000 bricks:
Materials used: Coal tons, at Rs.100 per ton
Sand Rs.100 per 1,000 Bricks
Other materials Rs.20, 000
Labour:
Sand Digging Rs.10, 000
Brick making Rs.20, 000
Overheads:
Production 20% of prime cost
General 25% of works cost
Brick made and sold 1, 00,000 at Rs.1, 000 bricks. There was no opening or
closing stocks.
 Solution:
Particulars Total 1,00,000 Cost per 1,000
Bricks Rs. Bricks Rs.
Materials Used:
Coal 500 x 100 50,000
Sand 𝟏𝟎𝟎 /𝟏𝟎𝟎𝟎 x 1,00,000 Other materials 10,000
20,000
Labour: 80,000 800
Sand Digging
Brick making 10,000
Prime cost 20,000 300
Add: 1,10,000 1100
Production overheads (20 % of prime cost )
Work cost 22,000 220
Add:
General overheads (25% of works cost ) 1,32,000 1320

33,000 330

Sales (𝟑,𝟎𝟎𝟎/ 𝟏,𝟎𝟎𝟎 x 1,00,000)

1,65,000 1650
1,35,000 1350
3,00,000 3000

3. What is transport costing? What are its objectives and merits?

A) Transport costing-Operating costing as applicable to transport services

The term ‘Transport’ includes all modes of transport like Air, Water, Rail and Road.
However, the present discussion is confined to Road transport only. Road transport includes
both passenger transport and goods transport. It may be carried out by Trucks, Buses,
Tempos, Taxis etc.
Objectives of Transport costing:
The following are the common objective of operating Costing in the transport service:
(a) Cost ascertainment: Finding out the costs of operating the vehicles.
(b) Price fixation: Determining the prices to be charged for the usage of service by
customers.
(c) Quotations: Providing, appropriate and required data for preparing quotations on
customers’ enquiries.
(d) Decision data: Providing information for managerial decisions like comparative cost
benefit of different vehicles.
(e) Control over maintenance: Ensuring that repairs and maintenance expenditure of the
vehicles is under control.
(f) Operational efficiency: Assessing and highlighting the efficiency with which vehicles are
rented out and the expenses incurred while operating them.

Benefits or advantages operating costing in transport organisations

(a) Reliable prices: Prices fixed for the services are accurate, fair and reliable.
(b) Cost recovery: All the costs incurred are ensured to be recovered from the users of the services.
(c) Cost control: Cost can be controlled and wherever possible reduced with the help of the
information made available.
(d) Policy decisions: Comparative costs and revenues of different vehicles and also relative benefits
of owned and hired vehicles are made available. Such information is invaluable in policy information.
(e) Logistics: Routing and scheduling the vehicles and the loads to be carried by different vehicles
become easier because of the cost data made available.

4. A radio manufacturer makes 2 models-3 band set and two in one. From following
particulars, prepare a statement showing cost and profit per model per unit sold.
There are no opening or closing stocks.
Particulars
3 Band Two in one
Rs. Rs.
Material
labour 27,300 1,08,680
15,600 62,920
Work overhead is change at 80% on labour and office overhead is taken at 15% on works
cost. The selling price of both models is Rs. 1000. 78 three band sets and 286 two in one
models were sold.
Solution:
Statement showing cost and profit per model, per unit
Particulars 3 Band sets Two in one
Rs. Rs.
Total per Total Per unit
(Rs) unit 286 units Rs. P.
Materials 27,300
78 units 350.00 1,08,680 380.00
Labour 15,600 200.00 62,920 220.00

Prime cost 42900 550.00 1,71,600 600.00

Works overhead (80% on labour) 12,480 160.00 50,336 176.00
Works cost 55,380 710.00 2,21,936 776.00
Office overhead 8,307 106.50 33,290 116.40
(15% on works cost)
63,687 816.50 2,55,226 892.40
Cost of production
Profit (Bal.fig)
14,313 183.50 30,774 107.60

Sales (at Rs. 1,000perunit)

78,000 1,000.00 2,86,000 1,000.00

5. Coal India Ltd., recorded an output of 80,000 tons of saleable coal during 2010. From
the following details, ascertain the cost of coal raised (a) per ton (b) for 80,000 tons.
Solution:
Particulars Rs.

Royalty to the state government at 1,60,000

Rs. 2 per ton raised
Wages:
Underground 4,00,000
On the surface 1,20,000
Working expenses:
Stores and consumables 24,000
Depreciation of tools, etc., 56,000
Rent, rates and taxes 40,000
Repairs and renewals 20,000
Timber and other materials 16,000
Sundry expenses 40,000
The general administration and selling expenses amounted to Rs. 2, 40,000.
Solution:
 Coal India Ltd.
Statement of cost
For the year 2010
(Output 80,000 Tons)
Particulars Rs. Per ton

Royalty
Wages: 1,60,000 2.00
Underground 4,00,000 5.00
1,20,000
On the surface 1.50

Prime cost
6,80,000 8.50
Add: Works expenses:
Stores and consumables
24,000 0.30
Depreciation of tools
56,000 0.70
Rent and rates
40,000 0.50
Repairs and renewals
20,000 0.25
Timber and other materials
16,000 0.20
Sundry expenses
40,000 0.50
Works cost
8,76,000 10.95
Add: Administration and
2,40,000 3.00
selling expenses
11,16,000 13.95

6. Mr. Subramanyan furnishes you the following data and wants you to compute the cost
per running km of vehicle A.
Particulars Rs.
 Cost of vehicle 2,50,000
Road licence per year 800
Annual supervision & salaries 2,700
Driver’s wages per hour 4
Cost of fuel per litre 12
Repairs & maintenance per km 2
Tyres cost per km 1
Insurance premium p.a. 700
Garage rent per year 1,300
Kms run per litre 20
Kms run during the year 15,000
Estimated life of vehicle in kms 1,00,000
Average tonnage carried 6

Change interest at 5% per annum on cost of vehicle. The runs 20kms per hour on an
average.
Solution:
Statement showing cost per running ton km
Particulars Per annum 90,000 Per ton km
ton kms Rs.p
Rs.

Standing charges
800
Road licence
Supervision & Salaries 2700
Insurance
700
Garage rent
Interest on vehicle cost 1300
(2,50,000x 5100) 12,500
Total standing charges (A)
18,000 0.20
Maintenance charges:
Repairs & maintenance (15,000x2)
30,000
Tyres (15,000 x1 )
Total maintenance (B)
15,000

Running or operating charges 45,000 0.50

 Depreciation ( 2,50,0001,00,000 x 15,000 )
Driver’s wages ( 420 x 15,000 ) 37,500

Fuel ( 1220 x 15,000 ) 3,000

9,000
Total running charges
49,000 0.55
Total cost (A+B+C)
1,12,000 1.25

Note
(1) Since average tonnage carried is given, cost per running km is interpreted
as running ton kms. Running Ton kms = 15,000 x6 = 90,000
(2) Driver’s wages and depreciation are running charges because they are related to distance covered.

UNIT IV

1. Define Process costing? Explain the characteristic features of process costing?

A) According to I.C.M.A London “process costing is that for of operation costing where
standardised goods are produced”. Process costing is a method of costing which is
used to ascertain the cost of output at each stage of production.
The following are the characteristic of process costing

a. Production is continuous in a series of stages called processes.

b. Each process is deemed as a cost centre and costs are accumulated for each process
separately along with output, finished and in progress.
c. Products and processes are standardised.
d. The output of one process becomes the raw materials to the next process, usually
till the final product is completed.
e. The cost of previous process is transferred to the next process along with the
output. Sometimes, the transfer may be at a transfer price inclusive of profit.
f. There may be process losses of the input. They may be normal or abnormal or both.
 g. Completed and semi finished output have to be expressed in common terms for cost
determination.
h. Since production is of identical units, the total cost of process is divided with the
units of output to obtain average cost per unit.
i. Two or more products may be produced unavoidably in the same process. They may
be of equal importance or of disproportionate values.
j. It is not possible or necessary to trace or identify specific lots of materials inputs
with product or output.
2. Srikar & co produces a product through two processes J and K. Prepare the process
accounts from the following details relating to March 2007.

Particulars Process J Process K

Materials 45,000 15,000
Labour 60,000 25,000
Chargeable expenses 5,000 10,000
The overheads amounting to Rs. 17000 are to be apportioned on the basis of Labour.
Solution:
Process “J” a/c
Particulars Rs. Particulars Rs.
To Materials 45,000
By process K a/c
To Labour 60,000 (output
1,22,000
To Chargeable expenses 5,000 transferred)
To overheads(17000*60/85) 12,000
1,22,000 1,22,000

Process” K” a/c
Particulars Rs. Particulars Rs.
To process JA/c transfer 1,22,000
By process K a/c
To materials 15,000 (output
1,77,000
To labour 25,000 transferred)
To chargeable expenses 10,000
To overheads (17,000*25/85) 5,000
1,77,000 1,77,000
3. Explain the advantage and disadvantages of process costing
Advantages:
(i) Cost of each process and that of the finished product can be computed at short intervals,
weekly or daily
(ii) Cost control over production are more effective because if uniform output and usage of
predetermined costs as budgeted or standard costs.
(iii) Cost ascertainment is simple and less expensive
(iv) Average cost per unit can easily be obtained
(v) Indirect expenses can be apportioned and allocated more accurately and reliable data can
be obtained.
(vi) Valuation of inventories is easier and accurate
(vii) Quotations become easier due to standardised processes
Disadvantages:
(i) Cost obtained at the end of processes are historical costs and their utility for cost control and
managerial decision making is not significant
(ii) Inefficiencies in processes can be concealed
(iii) Later processes may be adversely affected due to inefficiency of earlier processes
(iv) Evaluating the efficiency of individual workers or supervisors is difficult
(v) Apportionment of Joint costs to common products may lead to irrational pricing decisions.
4. A product passes through three processes ‘X’ ‘Y’ and ‘Z’ to its completion. During
September 2006, 5000 units of finished product were produced and the following expenses
were incurred:
Particulars Process X (Rs) Process Y (Rs) Process Z(Rs)

Material 5,000 10,000 5,000

Direct Wages 25,000 20,000 15,000
Direct 2,500 3,000 5,000
Expenses

Indirect Expenses amount Rs.30, 000 which are to be apportioned to the processes on the basis of
direct wages. Raw materials worth Rs.30,000 were issued to process ‘X’. Ignore the question of
process stocks and prepare the process ‘X’. Ignore the question of process stocks and prepare the
process accounts, showing cost per unit in each process.
 Solution:
Process X Account
Particulars Cost per unit Total cost Particulars Cost per unit Total cost
(Rs) (Rs) (Rs) (Rs)

To Raw materials 6.00 30,000 By Process Y

A/c
To Other materials 1.00 5,000
(output 15.00 75,000
To Direct Wages 5.00 25,000 transferred)
To Direct Expenses 0.50 2,500
To Indirect Expenses 2.50 12,500
(30,000 x 2560 )

15.00 75,000 15.00 75,000

Process Y Account
Particulars Cost per unit Total cost Particulars Cost per unit Total cost
(Rs) (Rs) (Rs) (Rs)
To X Account 15.00 75,000
By Process Z
To Raw materials 23.60 1,18,000
A/c
2.00 10,000
To Direct Wages (output
4.00 20,000 transferred)
To Direct Expenses
0.60 3,000
To Indirect Expenses
2.00 10,000
(30,000 x 20/60 )

23.60 1,18,000 23.60 1,18,000

Process Z Account
Particulars Cost per unit Total cost Particulars Cost per unit Total cost
(Rs) (Rs) (Rs) (Rs)
To Y Account 23.60 1,18,000
To Raw materials 1.00 5,000
To Direct Wages 3.00 15,000 30.10 1,50,500
To Direct Expenses 1.00 5,000
To Indirect Expenses 1.50 7,500
(30,000 x 15/60 )
 30.10 1,50,500 30.10 1,50,500
By Finished
stock
(output
transferred)
5. Suman industries produce a product which passes through two processes I and II
and then to finished stock. It is ascertained that in each process 5% of the total
weight put in is lost and 10% is scrap which realises Rs. 5 per ton and Rs. 15 per
ton respectively in processes I & II. The following details are available.
Particulars Process I Process II
Materials consumed in tons 2000 140
Cost of materials per ton 200 300
Wages 20000 15000
Manufacturing expenses 6000 5000
Prepare process accounts showing the cost of the output of each process and cost per ton

Solution: Process I A/c

Particulars Tons Rs. particulars Tons Rs.

To material consumed at 2,000 4,00,000 By loss in weight
Rs.200 per ton (2000*5%) 100 -
To wages 20,000 By normal scrap
To manufacturing 2000*10% at Rs. 5
expenses 6,000 per ton 200 1000

By process II A/c
(Transfer at
1700 4,25,000
4,26,000-
1000/2000-100-200
= Rs.250 per ton

2000 4,26,000 2000 4,26,000

Note : cost per ton = Total- scrap value/input units- loss in weight- normal scrap
 Process II A/c

Particulars Tons Rs. particulars Tons Rs.

To process I A/c 1,700 4,25,000 By loss in weight
(transfer) (1840*5%) 92 -
To material consumed at 140 42,000 By normal scrap
Rs.300 per ton 1840*10% at Rs.
To wages 15,000 15 per ton 184 2,760

To manufacturing 5,000 By finished stock

expenses 4,87,000-
1564 4,84,240
2760/1840-92-184
= Rs.309.62per ton
1,840 4,87,000 1,840 4,87,000

6. A joint process results in the production of three products A, B and C at a total

cost of Rs. 26250.The subsequent costs of the product were Rs. 8000, Rs.10000
and Rs. 12000 respectively.
They were sold as follows with estimated profit on sales.
Product A: Rs. 20000, profit 20%
Product B: Rs. 28000, profit 25%
Product C: Rs. 40000, Profit 30%
Show the apportionment of Joint costs on the basis of Net realisable value.
Solution:
Statement showing apportionment of joint costs
Particulars Products
A B C Total
Sales 20,000 28,000 40,000 88,000
(-) profit on sales (as per % given) 4,000 7,000 12,000 23,000
Total cost 16,000 21,000 28,000 65,000
Separation cost (or) post separation costs 8,000 10,000 12,000 30,000
Net realisable value
Ratio for division of joint cost 8,000 11,000 16,000 35,000
Joint cost ( divided as per the ratio) 8 11 16 35

6,000 8,250 12,000 26,250

UNIT V
1. Define marginal cost. Explain the advantages of marginal cost.
A) Marginal cost is defined by I.C.M.A, London as “the amount at any given volume of
output by which aggregate costs are changed if the volume of output is increased or
decreased by one unit. In practice, this is measured by the total variable costs
attributable to one unit.”
Advantage of Marginal costing
Marginal costing is an important technique of managerial decision making. It is a tool
for cost control and profit planning. Under mentioned are the advantages of marginal
costing technique.
(1) Simplicity: The statement prepared under marginal costing can be easily
followed as it breaks up the cost as variable and fixed.
(2) Stock valuation: Stock valuation can be easily done and understood as it includes
only the variable cost.
(3) Meaningful reporting: Marginal costing serves as a good basis for reporting to
management. The profits are analysed from the point of view of sales rather than
production.
(4) Effect of fixed costs: The fixed costs are treated as period costs and are charged to
P&L A/c directly. Thus they have practically no effect on decision making.
(5) Profit planning: The cost-volume-profit relationship is perfectly analysed to
reveal efficiency of products, processes and departments. ‘Breakeven point’ and
‘Margin of Safety’ are the two important concepts helpful in profit planning. Most
advantageous volume and cost to maximise profits within the existing limitations can
be planned.
 (6) Cost control and cost reduction: Marginal costing technique is helpful in
preparation of flexible budgets as the costs are split into fixed and variable portions.
The emphasis is laid on variable cost for control. The fixed costs are also controlled
by ascertaining them separately for computing profit and for control. The constant
focus on cost and volume, and their effect on profit pave way for cost reduction.
(7) Pricing Policy: Marginal costing is immensely helpful in determination of selling
prices under different situations like recession, depression, introduction of new
product, etc. Correct pricing policy can be developed under the marginal costing
technique with the help of the cost information, revealed therein.
(8) Helpful to Management: Marginal costing is helpful to management in
exercising decisions regarding make or buy, exporting, key factor and numerous other
aspects of business operations.
2. The fixed expenses of an industrial concern amount to Rs. 1,80,000. Its variable
cost per unit is Rs. 29 and selling price is Rs. 44 per unit. Calculate the breakeven
point.
Solution:
Contribution per unit = Selling price per unit – Variable cost per unit
=Rs. 44 – Rs. 29 = Rs. 15
P/V Ratio = 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 /𝑆𝑎𝑙𝑒𝑠 x100
= 𝑅𝑠.15 /𝑅𝑠.44 x100 = 34.0909%
Breakeven point (in units) (or) Break even sales volume
= Fixed expenses /Contribution per unit
= Rs.1,80,000/ 15 = 12,000 units
Breakeven point (in rupees) (or) Break even sales value
= Fixed expenses/ P V Ratio
= 1,80,000/ 34.0909%
= Rs. 5,28,000

3.A.G. Ltd. furnished you the following related to the year 2009

first half of second half of

the year the year

Rs. Rs.
 Sales 45,000 50,000

Total cost 40,000 43,000

Assuming that there is no change in prices and variable cost and that the fixed expenses are

incurred equally in the 2 half year periods, calculate for the year 2009:

(a) The profit volume ratio

(b) Fixed expenses

(c) Break even sales and

(d) % of margin of safety

Solution:

Particulars First half Second half Change in sales and profit

Rs. Rs. Rs.
Sales 45,000 50,000 5,000
(-) cost 40,000 43,000 3,000

Profit 5,000 7,000 2,000

(a) P/v ratio= change in profit/ change in sales *100

= 2,000/5,000 *100
= 40%

Contribution = sales* p/v ratio

= 45,000*40% or 0.4

= Rs. 18,000

(b) Fixed cost= contribution – profit

= 18,000- 5,000
For 1ST year = Rs. 13,000
Fixed cost for full year = 13,000*2
 = Rs 26,000
(c) Break even sales = fixed cost/ p/v ratio
= 26,000/40%
= Rs.65,000
(d) Margin of safety = sales- break even sales
= 95,000- 65,000
= Rs. 30,000
Percentage of margin of safety
= margin of safety/sales for the year*100
= 30,000/95,000*100
=31.58%

4. From the following information relating to Palani Bros. Ltd., you are required to find out

(a) P/V Ratio (b) Breakeven point (c) Profit (d) Margin of Safety (e)

Volume of sales to earn profit of Rs. 6,000.

Rs.

Total fixed costs 4,500

Total variable costs 7,500

Total sales 15,000

Solution: Marginal cost and contribution statement

particulars Amount

sales 15,000

(-) variable cost 7,500

contribution 7,500
(-) fixed cost 4,500
profit 3,000

(a) P/v Ratio = contribution/sales*100

= 7,500/15,000*100

= 50% or 0.5

(b) Break even sales= fixed expenses/ P/v Ratio

= 4,500/0.5

= Rs. 9,000

(c) profit = Rs.3,000

(d) Margin of safety = Actual sales- Break even sales

= 15,000- 9,000

= Rs.6,000

(e) sales to earn profit of Rs.6,000

Required sales = Fixed cost+ Required profit/ P/v Ratio

= 4,500+6,000/0.5

= Rs.21,000

5. Calculate breakeven point from the following:

Sales 1,000 units at Rs. 10 each Rs. 10,000
Fixed cost – Rs. 8,000
Variable cost per unit Rs 6
(b)If the selling price is reduced to Rs. 9, what is the new breakeven point?
Solution:
(a) contribution= selling per unit- variable cost per unit
 = 10- 6
= Rs 4 per unit
P/v ratio= contribution/ sales*100
= 4/10*100
= 40% or 0.4
Breakeven point (units) = fixed expenses/ contribution per unit
= 8,000/ 4
= 2000 units
Breakeven point in (Rs)= fixed expenses/ P/v ratio
= 8000/0.4
= Rs 20,000
(b) If the selling price per unit reduced to Rs.9 per unit
New selling price = Rs 9 per unit
(c) contribution= selling per unit- variable cost per unit
= 9- 6
= Rs 3 per unit
P/v ratio= contribution/ sales*100
= 3/9*100
= 33.33333%
Breakeven point (units) = fixed expenses/ contribution per unit
= 8,000/ 3
= 2,667 units
Breakeven point in (Rs)= fixed expenses/ P/v ratio
= 8000/33.3333%
= Rs 24,000
6. From the following data calculate :

P/V Ratio; (b) Variable cost and (c) Profit

 Rs.
Sales 80,000
Fixed expenses 15,000
Breakeven point 50,000

solution:

(a) calculation of P/v ratio

Breakeven point = Fixed cost/ P/v ratio

50,000 = 15,000/P/v

P/v ratio= 15000/50,000*100

= 30%

(b) calculation of variable cost

Contribution = sales* P/v ratio

= 80,000* 30%

=Rs. 24,000

Variable cost = sales- contribution

= 80,000-24,000

= Rs. 56,000

(c) calculation of profit

Profit = contribution- fixed cost

= 24,000- 15,000

= Rs. 9,000