MTP Oct’21

CA Inter Cost DJB MTP Oct’21

1
Overheads - Machine Hour Rate
A machine costing ₹ 10 lakhs, was purchased on 01-04-2021. The expected life of the machine
is 10 years. At the end of this period its scrap value is likely to be ₹ 10,000. The total cost of all
the machines including new one was ₹ 90 lakhs.
The other information is given as follows:
(i) Working hours of the machine for the year was 4,200 including 200 non-productive hours.
(ii) Repairs and maintenance for the new machine during the year was ₹ 6,000.
(iii) Insurance Premium was paid for all the machine ₹ 9,000.
(iv) New machine consumes 8 units of electricity per hour, the rate per unit being ₹ 3.75
(v) The new machine occupies 1/10th area of the department. Rent of the department is
₹ 2,400 per month.
(vi) Depreciation is charged on straight line basis.
COMPUTE machine hour rate for the new machine. [5]

Machine Hour Rate

Answer
Computation of machine hour rate of new Machine
Total Per hour
(₹) (₹)
A. Standing Charges
 1
I. Insurance Premium  ` 9 , 000   1,000
 9

 1 
II. Rent   ` 2, 400  12 months  2,880
 10 
3,880 0.97*

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B. Machine expenses
I. Repairs and Maintenance (₹ 6,000 ÷ 4,000 hours) 1.50
 ` 10 , 00 , 000  ` 10 , 000 
II. Depreciation   24.75
 10 years  4 , 000 hours 
III. Electricity (8 units × ₹ 3.75) 30.00
Machine hour rate 57.22
Working Note
Calculation of Productive Machine Hour Rate
Total hours 4,200
Less: Non-Productive hours 200
Effective machine hours 4,000
* ₹ 3,880 ÷ 4,000 hours = ₹ 0.97

2
Contract Costing
From the following particulars, COMPUTE Notional profit and estimated profit on a contract
(which has been 80% complete): [5]
(₹)
Total expenditure to date 4,00,000
Estimated further expenditure to complete the contract (including contingencies) 22,000
Contract price 5,44,000
Work certified 4,89,600
Work uncertified 30,200
Cash received 3,91,680

Notional Profit and Estimated Profit

Answer
Computation of Notional Profit
(₹)
Value of work certified 4,89,600
Less: Cost of work certified (₹ 4,00,000 – ₹ 30,200) 3,69,800
Notional profit 1,19,800

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Computation of Estimated Profit

(₹)
Contract price 5,44,000
Less: Estimated total cost
Cost of work to date 4,00,000
Estimated further expenditure to complete the contract 22,000 4,22,000
Estimated profit 1,22,000

3
Material Costing
The yearly production of a company’s product which has a steady market is 40,000 units. Each
unit of a product requires 1 kg. of raw material. The cost of placing one order for raw material
is ₹ 1,000 and the inventory carrying cost is ₹ 20 per annum. The lead time for procurement
of raw material is 36 days and a safety stock of 1,000 kg. of raw materials is maintained by the
company. The company has been able to negotiate the following discount structure with the
raw material supplier:
Order quantity (kg.) Discount (₹)
Upto 6,000 NIL
6,001 – 8,000 4,000
8,001 – 16,000 20,000
16,001 – 30,000 32,000
30,001 – 45,000 4,0000
You are REQUIRED to: [10]
(i) Calculate the re-order point considering 30 days in a month.
(ii) Prepare a statement showing the total cost of procurement and storage of raw material
after considering the discount of the company elects to place one, two, four or five orders
in the year.
(iii) State the number of orders which the company should place to minimize the costs after
taking EOQ also into consideration.

Re-order point, Total Cost at different level

and No. of orders

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Answer
Working notes
1. Annual production = 40,000 units
2. Raw material required for 40,000 units (40,000 units × 1 kg.) = 40,000 kg.
2 × 40 , 000 kgs. × ` 1, 000
3. EOQ = = 2,000 kgs.
` 20
4. Total cost of procurement and storage when the order size is equal to EOQ or 2,000 kg.

No. of orders (40,000 kg. ÷ 2,000 kg.) = 20 times

Ordering cost (20 orders × ₹ 1,000) = ₹ 20,000
Carrying cost (₹) (½ × 2,000 kg. × ₹ 20) = ₹ 20,000
Total cost ₹ 40,000

(i) Re-order point = Safety stock + Lead time consumption

40 , 000 kg.
= 1,000 kg. + × 36 days
360 days
= 1,000 kg. + 4,000 kg. = 5,000 kg.
(ii) Statement showing the total cost of procurement and storage of raw materials
(after considering the discount)
Total cost of
No. of Total cost of Average storage of
Order size Discount Total cost
orders procurement stock raw
materials
Kg. (₹) Kg. (₹) (₹) (₹)
(1) (2) (3)=(2)×₹ 1,000 (4) = ½×(1) (5)=(4)×₹ 20 (6) (7)=[(3)+(5)– (6)
40,000 1 1,000 20,000 4,00,000 40,000 3,61,000
20,000 2 2,000 10,000 2,00,000 32,000 1,70,000
10,000 4 4,000 5,000 1,00,000 20,000 84,000
8,000 5 5,000 4,000 80,000 4,000 81,000
(iii) Number of orders which the company should place to minimize the costs after taking
EOQ also into consideration is 20 orders each of size 2,000 kg. The total cost of procure-
ment and storage in this case comes to ₹ 40,000, which is minimum. (Refer to working
notes 3 and 4)

4
Cost Sheet
Xim Ltd. manufactures two types of boxes ‘Super’ and ‘Normal’. The cost data for the year ended
31st March, 2021 is as follows:

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(₹)
Direct Materials 12,00,000
Direct Wages 6,72,000
Production Overhead 2,88,000
Total 21,60,000
There was no work-in-progress at the beginning or at the end of year. It is further ascertained
that:
1. Direct materials cost per unit in ‘Super’ was twice as much of direct material in ‘Normal’.
2. 2% cash discount was received for payment made within 30 days to the creditors of Direct
materials.
3. Direct wages per unit for ‘Normal’ were 60% of those of ‘Super’.
4. Production overhead per unit was at same rate for both the types of boxes.
5. Administration overhead was 200% of direct labour for each type.
6. Selling cost was ₹ 1 per ‘Super’ type.
7. Production and sales during the year were as follows:
Production Sales
Type No. of units Type No. of units
Super 60,000 Super 54,000
Normal 1,80,000
8. Selling price was ₹ 30 per unit for ‘Super’.
9. Company was also involved in a copyright infringement case related to the manufacturing
process of ‘Super’ production. As per the verdict, it had to pay penalty of ₹ 50,000.
PREPARE Cost Sheet of Xim Ltd. for ‘Super’ showing:
(i) Cost per unit and Total Cost
(ii) Profit per unit and Total Profit [10]

Use of Total Cost Ratio

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Answer
Cost Sheet of ‘Super’
Particulars Per unit (₹) Total (₹)
Direct materials (Working note- (i)) 8.00 4,80,000
Direct wages (Working note- (ii)) 4.00 2,40,000
Prime cost 12.00 7,20,000
Production overhead (Working note- (iii)) 1.20 72,000
Factory Cost 13.20 7,92,000
Administration Overhead (200% of direct wages) 8.00 4,80,000
Cost of production 21.20 12,72,000
Less: Closing stock (60,000 units – 54,000 units) - 1,27,200
Cost of goods sold i.e. 54,000 units 21.20 11,44,800
Selling cost 1.00 54,000
Cost of sales/ Total cost 22.20 11,98,800
Profit 7.80 4,21,200
Sales value (₹ 30 × 54,000 units) 30.00 16,20,000
Working Notes:
(i) Direct material cost per unit of ‘Normal’ = M
Direct material cost per unit of ‘Super’ = 2M
Total Direct Material cost = 2M × 60,000 units + M × 1,80,000 units
Or, ₹ 12,00,000 = 1,20,000 M + 1,80,000 M
` 12, 00 , 000
Or, M = =₹4
3, 00 , 000
Therefore, Direct material Cost per unit of ‘Super’ = 2 × ₹ 4 = ₹ 8
(ii) Direct wages per unit for ‘Super’ =W
Direct wages per unit for ‘Normal’ = 0.6W
So, (W × 60,000) + (0.6W × 1,80,000) = ₹ 6,72,000
W = ₹ 4 per unit
` 2, 88 , 000
(iii) Production overhead per unit = = ₹ 1.20
 60, 000  1, 80, 000 
Production overhead for ‘Super’ = ₹ 1.20 × 60,000 units = ₹ 72,000
Notes:
1. Administration overhead is specific to the product as it is directly related to direct
labour as mentioned in the question and hence to be considered in cost of production
only.

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2. Cash discount is treated as interest and finance charges; hence, it is ignored.

3. Penalty paid against the copyright infringement case is an abnormal cost; hence, not
included.

5
Standard Costing
Following information has been provided by a company:
Number of units produced and sold 9,000
Standard labour rate per hour ₹ 12
Standard hours required for 9,000 units -
Actual hours required 25,641 hours
Labour efficiency 105.3%
Labour rate variance ₹ 1,53,846 (A)
You are required to CALCULATE:
(i) Actual labour rate per hour
(ii) Standard hours required for 9,000 units
(iii) Labour Efficiency Variance
(iv) Standard labour cost per unit
(v) Actual labour cost per unit. [10]

Labour Variances

Answer
SR – Standard Labour Rate per hour
AR – Actual Labour Rate per hour
SH – Standard Hours
AH – Actual Hours
(i) Labour Rate Variance = AH (SR – AR)
- 1,53,846 = 25,641 (12 – AR)
-6 = 12 – AR
AR = ₹ 18

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SH
(ii) Labour Efficiency = ×100 = 105.3
AH
AH 105.3 25, 641 105.3
SH = 
100 100
SH = 26,999.973
SH = 27,000 hours
(iii) Labour Efficiency Variance = SR (SH – AH)
= 12 (27,000 – 25,641)
= ₹ 16,308 (F)
27, 000 × 12
(iv) Standard Labour Cost per unit = = ₹ 36
9 , 000
25, 641× 18
(v) Actual Labour Cost per unit = = ₹ 51.282
9 , 000

6
Basis of Cost Accounting
How do you deal with the following in cost accounts? [5]
(i) Fringe benefits
(ii) Bad debts.

Treatment of items in Cost Accounts

Answer
(i) Fringe benefits: These are the additional payments or facilities provided to the workers
apart from their salary and direct cost-allowances like house rent, dearness and city
compensatory allowances. These benefits are given in the form of overtime, extra shift
duty allowance, holiday pay, pension facilities etc.
These indirect benefits stand to improve the morale, loyalty and stability of employees
towards the organisation. If the amount of fringe benefit is considerably large, it may be
recovered as direct charge by means of a supplementary wage or labour rate; otherwise,
these may be collected as part of production overheads.
(ii) Bad debts: There is no unanimity among different authors of Cost Accounting about
the treatment of bad debts. One view is that ‘bad debts’ should be excluded from cost.

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According to this view bad debts are financial losses and therefore, they should not be
included in the cost of a particular job or product.
According to another view it should form part of selling and distribution overheads,
especially when they arise in the normal course of trading. Therefore, bad debts should
be treated in cost accounting in the same way as any other selling and distribution cost.
However extra ordinarily large bad debts should not be included in cost accounts.

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