Course: Cost & Management Accounting

Internal Assignment Applicable for December 2022 Examination

Question No.1:
The data shown below relate to an industrial organization that manufactures household
appliances.
Standard quantity required of materials item 0009 1 kg.
Standard price per kg. ₹ 10
Product in a month appliances 100 kgs.
Actual quantity of materials used 98 kgs.
Actual price paid ₹ 11/kg
The following calculations for variances have been made:
Material usage variance = 2 kgs. @ ₹ 11 = ₹ 22
Material price variance = 100 kgs. × ₹ 1 = ₹ 100
Do you agree with these calculations? If not, provide a correct calculation for the
variances.
Answer:
Material Price Variance measures the variance arises in the material cost due to
difference in the actual material purchase price from standard material price.
It is calculated as,
Material Price Variance = Actual Quantity Used* (Standard Price – Actual Price)
Therefore, it is the difference between the standard price and the actual price for the
actual quantity used.

Material Usage Variance measures variance in material cost due to usage or

consumption of materials.
It is computed as,
Material Usage Variance = Standard Price * (Standard Quantity – Actual Quantity)
Therefore, it is the difference between the standard quantity planned for production
and actual quantity used for production.
Solution: The given analysis of variances is NOT CORRECT. The correct calculation of
variances is as follows-
 Course: Cost & Management Accounting
Internal Assignment Applicable for December 2022 Examination
Computation of Material Usage Variance:
Material Usage Variance = Standard Price * (Standard Quantity – Actual Quantity)
= Rs.10 * (100 kgs * 1 kg – 98 kgs)
= Rs. 10 * (100 kgs - 98 kgs)
= Rs. 10 * 2 kgs
= Rs. 20 (Favourable Variance)
Computation of Material Price Variance:
Material Price Variance = Actual Quantity Used * (Standard Price – Actual Price)
= 98 Kgs * (Rs.10 – Rs.11)
= 98 Kgs * Rs.1
= Rs.98 ( Unfavourable Variance)
Hence, the correct calculations of-
Material Usage Variance = Rs.20
Material Price Variance = Rs. 98

Question no.2:
ABC Ltd. started a factory in Kolkata on 1st April, 2021. Following details are
furnished about its activity during the year ended 31st March 2022.
Raw Material consumed – 40,000 units @ ₹7 per unit.
Direct Wages:
Skilled worker – ₹9 per unit.
Unskilled worker – ₹6 per unit.
Royalty (on raw material consumed) @ ₹3 per unit.
Works overheads @ ₹8 per machine hour.
Machine Hours Worked 25,000.
Office Overheads at 1/3rd of works cost.
Sales Commission @ ₹4 per unit.
Units produced 40,000
 Course: Cost & Management Accounting
Internal Assignment Applicable for December 2022 Examination
Stock of units at the end 4,000 units, to be valued at cost of production per unit.
Sale price is ₹60 per unit.
Prepare Cost sheet showing the various elements of cost.
Answer:
A Cost Sheet or a Cost Statement is a document which provides a detailed information
of the cost and cost per unit of a product.
The important components of Cost Sheet are as follows:-
• Prime Cost : Prime cost represents the total of direct material cost , direct labour
cost and direct expenses. It is calculated as –
Prime cost = Direct material consumed + Direct labour cost + Direct expenses

• Works Cost : Works cost is also known as Factory cost. It means that the cost of a
product up to the process at the factory. It is calculated as-
Net Factory cost = Prime cost + Factory overheads + Value of opening work-
in-progress - Value of closing work-in-progress .

• Cost of Production : Cost of production refers to the total of prime cost and factory
related cost and the overheads. It can be calculated as-
Cost of Production = Factory Cost + Administration cost

• Cost of Goods Sold : Cost of goods sold is the cost of production for the goods sold.
It is calculated as-
Cost of Goods Sold = Cost of Production +Value of opening finished goods –
Value of closing finished goods.

• Cost of Sales : Cost of sales refers to the total cost of a product incurred to make
the product available to the final consumer. It is calculated as-
Cost of Sales = Cost of goods sold + Selling and Distribution expenses

• Selling Price : After obtaining the final value of the cost of goods per unit, profit
margin is added to get the selling price of the product. It can be calculated as-
Selling Price = Cost of sales per unit * Profit margin in percent.

Solution :
Cost Sheet of ABC Limited for the Year Ended 31st March 2022
 Course: Cost & Management Accounting
Internal Assignment Applicable for December 2022 Examination

Particulars Amount Amount

Raw Material Consumed 2,80,000
(40,000 Units * Rs. 7 per unit)

Direct Wages:

Skilled worker wages 3,60,000

(40,000 Units * Rs.9 per unit)

Unskilled worker wages 2,40,000

( 40,000 Units * Rs.6 per unit)

Total Direct Wages 6,00,000

Direct Expenses:

Royalty on raw material consumed 1,20,000

( 40,000 Units * Rs.3 per unit)

PRIME COST 10,00,000

ADD: Factory Overhead:

Works Overhead 2,00,000
(25,000 Hours * Rs. 8 per hour)

FACTORY COST 12,00,000

ADD: Office and Administration Overhead:

Office overhead 4,00,000

( 1/3 * Rs.12,00,000)

COST OF PRODUCTION 16,00,000

LESS: Closing stock 1,60,000

(4000 units * Rs.16,00,000/40,000 units)

COST OF GOODS SOLD 14,40,000

ADD: Selling and Distribution Overheads:

Sales Commission 1,44,000
(36,000 units * Rs. 4)

COST OF SALES 15,84,000

ADD: Profit 5,76,000

SALES 21,60,000
(36,000 Units * Rs.60
 Course: Cost & Management Accounting
Internal Assignment Applicable for December 2022 Examination
3a. What are the implications of Economic Order Quantity in proper inventory
management?
Answer:
Economic Order Quantity is a technique which determine how much quantity to hold
which is economic in terms of cost. In other words, it is the size of an order for which total
of ordering cost and carrying cost are at minimum.
Economic Order Quantity mainly consists of two types of costs. They are-
* Ordering Cost
* Carrying cost
Ordering cost are the cost which are associated with the order of materials such as
cost to invite quotations, documentation works like preparation of purchase orders,
employee cost directly attributable to the procurement of materials, transportation
and inspection cost etc.
Carrying Cost are the cost of holding of inventories in the store such as cost of fund
invested in inventories, cost of storage, insurance cost etc.
The Economic Order Quantity is calculated as-
EOQ = √2* A * O/ C
Where,
A = Annual Requirement
O = Ordering cost per order
C = Carrying cost per unit per annum.
The implications of economic order quantity :
The important of economic order quantity is that, it helps the companies to
manage their inventories effectively and efficiently. Without proper inventory
management techniques, companies will tend to hold too much of inventories during
the period of low demand also holds too little inventory during the period of high
demand. Both creates the problems in managing the company which has great
opportunities in the market.

b. X Ltd. estimates its carrying cost at 15% and its ordering cost at ₹9 per order. The
estimated annual requirement is 48,000 units at a price of ₹4 per unit.
a) What is the most economical number of units to order?
b) How many orders should be placed in a year?
 Course: Cost & Management Accounting
Internal Assignment Applicable for December 2022 Examination
c) How often should an order be placed?
Answer:
GIVEN:
Annual Requirements (A)= 48,000 Units
Ordering Cost (O) = Rs.9 Per Order
Carrying Cost(C) = 15% of Rs. 4 Per unit
= Rs.0.6
a) The most economical number of units to order :

EOQ = √2 * A * O / C
= √2 * 48,000 units * Rs.9 per order / Rs.0.6 per unit
= √8,64,000 / Rs.0.6 per unit
= √1,44,0,000
=1200 Orders.
b) Number of Orders should be placed in a year:

Number of orders to be placed = Annual consumption / Economic Order Quantity

= 48,000 Units / 1200 orders
= 40 Orders.
c) Frequency of an order to be placed:
Frequency of order = 360 days / Number of order to be placed
= 360 days / 40 orders
= 9 Days.