NMIMS Global Access

School for Continuing Education (NGA-SCE)

Course: Cost and Management Accounting
Internal Assignment Applicable for June, 2023
Examination
Answer 1

Introduction

The structure of an income statement might seem rather varied depending on the

manufacturing company because of the various costing methodologies that are utilised. If you

comprehend the distinctions between the various costing methods, you will discover that

these variations were required since each way of costing results in tiny variations in the cost

of producing finished goods. Simply put, marginal costs refer to the expense of

manufacturing an additional unit. The calculation formula for marginal cost is:

Marginal cost = (Changes in total production costs) / (Changes in total quantity)

The cost of finished items, and by extension, opening and closing inventories, is the primary

factor that is influenced by the various costing methodologies. Because it is assumed that

fixed costs need not vary with the changes in the amount of production inside the short term,

only the variable production costs are included in marginal costs. Fixed costs are not included

because marginal costs only contain the variable production costs. This signifies that the

production cost solely includes variable costs. According to marginal costing, the stock of the

opening and closing stock likewise only comprises the variable cost factor and does not

include the absorbed fixed cost.

Concepts

Variable costs and fixed costs are two forms of accounting charges that firms must consider

when examining their profitability and costs.

Variable costs

Variable costs are expenditures that vary proportionally with production or activity level.

These expenses rise as production and perhaps sales rise, and fall as production and perhaps
even sales fall. Variable expenses include direct materials, direct labour, and commissions on

sales. Variable costs is directly proportional to sales or production levels and are typically

represented per unit.

Fixed costs

Fixed costs, which are on the other side, represent expenses that remain constant regardless

of output and sometimes activity levels. These expenses are fixed, no matter if the company

produces / sells more. Included as instances of fixed costs are rent, salary, and insurance.

Fixed costs are unrelated to sales or production levels and are generally defined as a total

cost.

Procedures

Given,

When 60,000 units are produced

Selling price per unit

Sales = Rs. 12,00,000

Selling price per unit = Sales / Total units = Rs. 12,00,000 / 60,000 = Rs. 20

Variable material cost per unit

Total Material cost = Rs. 2,40,000

Variable Material cost per unit = Total Material cost / Total units produced = Rs. 2,40,000 /

60,000 = Rs. 4
Variable labour cost per unit

Total Labour cost = Rs. 3,60,000

Variable labour cost per unit = Total Labour Cost / total units produced = Rs. 360,000 /

60,000 = Rs. 6

Variable overhead cost per unit

Total Overheads = Rs. 1,80,000 / 60,000 = Rs. 3

Variable labour cost per unit = Total Overheads / total units produced

= Rs. 180000 / 60000 = Rs. 3

Fixed cost

As long as the company is producing within the maximum capacity of 100,000 units, the

fixed cost remains the same. In other words, at 60,000 units of production and at 80,000 units

of production, the fixed cost remains the same at Rs. 3,20,000.

Income Statement (When 80,000 units are produced.)

Particulars Calculation Amount (Rs.)

Sales Selling price per unit x 80,000 16,00,000

= 20 x 80,000

Less: Variable Cost

Material Material cost per unit x 80,000 3,20,000

= 4 x 80,000

Labour Labour cost per unit x 80,000 = 6 x 5,40,000

 80,000

Overheads Overhead cost per unit x 80,000 = 3 x 2,40,000

80,000

Contribution 5,00,000

Less: Fixed Cost

Fixed Cost 3,20,000 3,20,000

Net Profit 7,20,000

Conclusion

So, we are able to generate the income statement based on a range of production units within

the maximum production capacity. Businesses must comprehend the distinction between

variable and fixed costs in to make well-informed choices regarding pricings, production

rates, & cost control. A corporation can establish its break-even point by assessing its variable

and fixed costs. The break-even point is the level of sales rather than productions at which the

company's revenues equals its total costs. This data can be utilised to establish price plans and

profitability forecasts. Also, the contribution margin reveals the concept underlying the

marginal costing approach. The marginal costings system has a short-term vision due to its

emphasis on variable expenses. The aspect of contribution margin demonstrates that the

marginal costings approach permits the company to evaluate the short-term feasibility of

production while isolating the fixed costs that affect the company's long-term perspective. As

long as marginal cost of a business is less than its selling price, the business will be able to

cover its fixed costs. However, if the marginal cost of a business is greater than its selling
prices, the productions of that good / service is no longer feasible because it cannot even

cover its short-term variable costs.

Answer 2

INTRODUCTION

Standard net income and certain other comprehensive income are both summarised in the

comprehensive income statement, also known as a financial statement (OCI). The net

incomes is the result of preparing a statement of income. Other comprehensive income,

however, includes all unrealized profit and losses on assets that have not been recorded on the

income statement. It is a more sophisticated document that is frequently utilised by

multinational firms with investments in numerous nations. The income statement is one of the

most essential components of a statement of comprehensive income. It summarises all

revenue and expense sources, including interest and tax expenses. Regrettably, the only

things that are taken into account when calculating net income are earned money and costs

paid. There are occasions when fluctuations inside the value of an organization's assets result

in gains or losses that are not reflected in net income. It's important to keep in mind that

incidents like these almost seldom take place in companies of this size range. OCI items arise

more frequently at larger corporations since those kinds of financial events occur more

regularly.

Concepts

Indirect costs that a company incurs that cannot be immediately ascribed to the particular
product / service are known as overhead. These costs must be allocated to the business's
products or services in order to establish their total cost.
There are numerous approaches to allocate overhead expenses, including:

 Hours Worked Method:

This method assigns overhead expenses according to the numbers of labour hours needed to
produce an item or perform a service. The overhead rate is added to each product / service
depending on the numbers of labour hours required to produce or deliver it. This approach
assumes that amount of overhead expenses is proportionate to the quantity of labour required.

 Technique for calculating machine hours

This method assigns overhead expenses according to the numbers of machine hours needed
to make a good or supply a service. The overhead rate is added to each product / service
depending on the numbers of machine hours required to produce it. This strategy implies that
the quantity of overhead expenses is exactly proportional to machine utilisation.

 Technique based on a percentage of direct wages:

This system assigns overhead expenses proportionally to direct pay. The overhead rate
obtained from dividing the entire overhead cost even by total direct wages is applied to every
product / service depending just on direct wages it requires. This method implies that the cost
of overhead is proportionate to the number on direct wages paid.

Procedures
1. Direct Labour Hour

In this method, we use direct labour to absorb the overhead cost.

To prepare a comprehensive statement of cost for the order, we need to calculate the cost of

the materials, direct wages, and overheads allocated to the order.

Calculation of cost of materials:

Material cost per order = Rs. 4,000

Total material cost for the order = Rs. 4,000

(Note: The cost of materials used in January is not relevant to this calculation.)

Calculation of cost of direct wages:

Direct wages per order = Rs. 3,300

Total direct wages for the order = Rs. 3,300

Calculation of overheads using direct labor hours:

Overhead rate per direct labor hour = (Overhead chargeable to the department / Total direct

labor hours)

= (Rs. 48,000 / 24,000 hours) = Rs. 2 per direct labor hour

Overhead allocated to the order = (Direct labor hours for the order x Overhead rate per direct

labor hour)

= (1,650 hours x Rs. 2 per hour) = Rs. 3,300

Comprehensive statement of cost for the order:

Particular Amount (Rs.)

Material Cost 4,000

Direct Wages 3,300

Overheads (allocated on the basis of direct 3,300

labor hours)

Total Cost 10,600

Therefore, the total cost of the order using overhead absorption rate based on direct
labor hours is Rs. 10,600.

2. Percentage of direct wages

In this method, we use the percentage of direct wages to absorb overhead cost.

To prepare a comprehensive statement of cost for the order, we need to calculate the cost of

the materials, direct wages, and overheads allocated to the order.

Calculation of cost of materials:

Material cost per order = Rs. 4,000

Total material cost for the order = Rs. 4,000

(Note: The cost of materials used in January is not relevant to this calculation.)

Calculation of cost of direct wages:

Direct wages per order = Rs. 3,300

Total direct wages for the order = Rs. 3,300

Calculation of overheads using percentage of direct wages

Overhead rate as a percentage of direct wages = (Overhead chargeable to the department /

Total direct wages) x 100% = (Rs. 48,000 / Rs. 60,000) x 100% = 80%

Overhead allocated to the order = (Direct wages for the order x Overhead rate as a percentage

of direct wages) = (Rs. 3,300 x 80%) = Rs. 2,640

Comprehensive statement of cost for the order:

Particular Amount (Rs.)

Material Cost 4,000

Direct Wages 3,300

Overheads (allocated on the basis of direct 2,640

labor hours)

Total Cost 9,940

Therefore, the total cost of the order using overhead absorption rate based on the

percentage of direct wages is Rs. 9,940.

3. Machine hour rate

In this method, we use direct machine hours to absorb the overhead cost.

To prepare a comprehensive statement of cost for the order, we need to calculate the cost of

the materials, direct wages, and overheads allocated to the order.

Calculation of cost of materials:

Material cost per order = Rs. 4,000

Total material cost for the order = Rs. 4,000

(Note: The cost of materials used in January is not relevant to this calculation.)

Calculation of cost of direct wages:

Direct wages per order = Rs. 3,300

Total direct wages for the order = Rs. 3,300

Calculation of overheads using machine hour rate:

Overhead rate per machine hour = (Overhead chargeable to the department / Total machine

hours)

= (Rs. 48,000 / 20,000) = Rs. 2.40 per machine hour

Overhead allocated to the order = (Machine hours for the order x Overhead rate per machine

hour) = (1,200 x Rs. 2.40) = Rs. 2,880

Comprehensive statement of cost for the order:

Particular Amount (Rs.)

Material Cost 4,000

Direct Wages 3,300

Overheads (allocated on the basis of direct 2,880

labor hours)

Total Cost 10,180

Therefore, the total cost of the order using overhead absorption rate based on the machine

hour rate is Rs. 10,180.

Conclusion

In conclusion, the mechanism for allocating overhead expenses is contingent upon the

structure of the firm and also the kinds of overhead expenses incurred. Depending on the

requirements of the firm in question, one particular technique of overhead cost allocation may

be more appropriate than another. The objective of assigning overhead expenses is to

precisely estimate the total cost of any product or service provided, so enabling firms to make

educated pricing, profitability, and cost management decisions. The change in an

organization's net equity over the course of a specific time period is detailed in the

comprehensive income statement. The statement for retained earnings is comprised of two

major components: net income and many other income statement, which contains the items

omitted from of the income statement.

Answer 3.A

Introduction

Economic Batch Quantity

Economic Batch Quantity (EBQ) is a concept in production management that refers to the

best batch size a business should generate to reduce total production & inventory holding

costs. It is sometimes referred to as the optimum batch size or optimal production size. The

EBQ calculation considers the fixed cost of establishing the production chain (such as

equipment setup, material handling, & labour expenditures) and variable cost of stocking

(such as storages, handlings, and obsolescence costs). The formula evaluates the trade-off

between both the cost of setup and the cost of maintaining inventory and calculates the

quantity that minimises total cost.

Concept

Typically, the EBQ is computed using mathematical equations that include demand rate,

setup costs, holding cost, & output rate. The purpose of calculating the EBQ is to identify the

best production amount that minimises the overall cost of production and inventory holding,

hence increasing the company's efficiency, profitability, and competitiveness. It can be

calculated using the following formula:

EOQ = sqrt ((2 * annual demand * ordering cost) / carrying cost per unit)

First, let's calculate the annual demand for Product A:

Ordering cost = Rs. 50 per order

Annual demand = Annual consumption of Product A = 5000 units

Next, let's calculate the carrying cost per unit:

Carrying cost per unit = 10% * Cost of product = 10% * Rs. 500 = Rs. 50

Now, we can substitute these values into the EOQ formula:

EOQ = sqrt ((2 * 5000 * 50) / 50) = sqrt (500000) = 707.11 units (approx.)

Therefore, the Economic Order Quantity is 707 units (approx.).

When Inventory maintained is 200 units?

If the inventory maintained by the company is 200 units, then we can use the following

formula to calculate the reorder point:

Reorder point = lead time demand + safety stock

Assuming a lead time of one order cycle, the lead time demand is equal to the annual demand

divided by the number of order cycles per year:

Lead time demand = annual demand / order cycles per year = 5000 / 1 = 5000 units

Assuming a safety stock of 200 units, we can calculate the reorder point:

Reorder point = 5000 + 200 = 5200 units

CONCLUSION
Therefore, if the inventory maintained by the company is 200 units, the reorder point is 5200

units. This means that the company should place an order for Product A when the inventory

level reaches 200 units and the actual demand reaches 5000 units, which would bring the

inventory level down to the safety stock level of 200 units.

Answer 3.b

INTRODUCTION

Break-even point

Knowing the numbers is vital for getting a better knowledge of your company and for making

plans for the future. Financial informations is the key to understandings the profitability of

the organisation. Every business must conduct a breakeven analysis to determine whether

sales volume is required to pay expenses. It is especially important for new businesses that

need to establish its initial sales goals. Breakeven occurs when a company's total revenue and

entire expenses are equal. This indicates that at breakeven points there's no profit; the net

result is zero.

CONCEPT

Calculation

To calculate the break-even point, we can use the following formula:

Break-even point (in units) = Fixed costs / (Sales price per unit - Variable costs per unit)

Given the information in the question, we can calculate the break-even point as follows:

Fixed costs = Rs. 5,00,000

Sales price per unit = Rs. 300

Variable costs per unit = Rs. 280

Break-even point (in units) = 5,00,000 / (300 - 280) = 5,00,000 / 20 = 25,000 units

Therefore, the break-even point is 25,000 units. This means that the company needs to sell

at least 25,000 units of the product to cover all its costs and avoid a loss. If the company sells

more than 25,000 units, it will make a profit, and if it sells less than 25,000 units, it will incur

a loss.

The significances of break-even points

The break-even point is an essential concept within financial management because that
enables organisations to identify the minimal number of sales or income they must earn to
pay their costs and prevent losses. Listed below are some of the major advantages of
comprehending the break-even point:

1. Assists firms with operational planning

By understanding their break-even point, organisations may set attainable sales goals and
manage operations appropriately. They can then adapt their sales and production activities
accordingly.

2. Aids companies in determining their pricing approach

The break-even level can also be used to evaluate the optimal pricing approach for generating
a profit. They are able to analyse the influence of various pricing levels upon their sales
profits and select a price which will enable them to achieve break-even & generate a profit.

3. assists businesses in cost management

By determining their point of break-even, firms can determine the both fixed and variable
expenses that influence their profitability. Then, they can take efforts to manage these
expenses, such as reducing fixed costs, negotiating better rates with suppliers, or increasing
manufacturing efficiency to reduce variable costs.

4. Assists firms in assessing their financial performance

By comparing their real revenue and sales to their break-even threshold, firms can assess
their financial success. If they're selling much more their break-even points, businesses are
making a profit; if they're selling less, they are suffering a loss.

CONCLUSION
So, understanding this break-even point is essential for businesses can make informed
decisions regarding pricing, production, & cost managements, which could also affect their
long-term profitability and performance. The process of calculating the breakeven points is an
ideal moment for firms to evaluate their genuine operating expenses and prices. Many
startups do not fully comprehend both direct and indirect costs. Working on breakeven
analysis will assist entrepreneurs and managers in learning these numbers and gaining greater
insight into to the accuracy for their prices and the realism of their sales targets.