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FAP
10th Jan 2022

Module 2
Techniques of Financial statement Analysis
- Vertical analysis – when we take one year accounting data and analyze it
e.g., Redrafted Statement – Redrafted income statement, Redrafted
balance sheet
Common Size Statement – Common size Income Statement, Common
Size Balance Sheet
- Horizontal analysis/Dynamic Analysis – When we take more than one

year data and analyze
- E.g., Comparative statement and Trend Percentages
➢ Redrafted Statements
- Redrafted Income Statement
- Redrafted Position Statement / Balance Sheet
➢ Comparative statement
➢ Common size statement
➢ Trend Percentages/Analysis
➢ GP/GL Vs. COGS 40% up is good
➢ Operating Expenses less than 20% is good
➢ Net operating Income and Gain /E&L – 2%
➢ Interest – LTB – its talk about Financial Leverage or Risk

➢ Tax
➢ ED & PD
➢ Appropriation of Profits
Redrafted Income Statement

Particulars Amount Amount
Gross Sales -
Less: Sales Tax/Sales Return -
Net Sales -
Less: COGS (OS+ Net Purchases + DE – CS)
Gross Profit
Less: Operating Expenses
- Office and Administration Expenses
- Selling & Distribution Expenses
OPBIT
Add: Non-Operating income
EBIT
Less: Interest
EBT
Less: IT
EAT
(-) PD
EAESHS
(-) ED
Retained Earnings
13th Jan 2022
1.
Redrafted Income Statement for the year ending 31 st march 2017
Gross Sales 8,15,000
Less: Sales Tax/Sales Return (5,000)
Net Sales 8,10,000
Less: COGS (45,000+3,10,000+27,850+2,150-
90,000) (2,95,000)
Gross Profit 5,15,000
- Salaries 152,950
- Rent, Rates and Taxes 85,000
- Advertising Expenses 92,000
- Bad debts and selling Expenses 6,750
- Administration Expenses 42,000
- Depreciation 12,000
- Interest on BOD 1150
- Miscellaneous Expenses 2,500 (3,94,350)
OPBIT 1,20,650
Add: Non-Operating income 7,000
(3,000+1750+2250)
1,27,650
Less: Non-Operating Expenses (3,000 + 1,050) (4,050)
EBIT 1,23,600
Less: Interest (37,500)
EBT 86,100
Less: corporate Tax 25% (21,525)
EAT 64,575
(-) PD (11,500)
EAESHS 53,075
(-) ED Nil
Retained Earnings 53,075
Comments/Inferences
➢ GP – 63.58%, Cogs – 36.42%
The Business has controlled direct expenses very well to post or
reassuring gross profit of 64% approximately.
➢ Operating Expenses – 48.68%

The Business could not control the Indirect Expenses and that has
resulted in a 50% Indirect Expenses to give the company a very less
operating profit of Rs. 1,20,000 approx.
➢ The Non-operating Expenses and is insignificant and the company does

not worry have to worry about it.
➢ Interest on Long term Borrowings – 3.3 approx.

No doubt the Business has financial leverage having a good amount of interest
paid up on long term Borrowings it should be noted that the quantum of
interest is on a higher side. (There is a high Financial Risk Involve)
➢ The company had paid out 11,500 as PD, ability of the company is quite
good however the worrying point is that they have not paid out any
equity dividend.
Conclusion:
The Company has curtailed Direct expenses very well, but failed
miserably in the case of indirect Expenses. Therefore, they could not
post better profits to reduce financial risk and pay equity Dividends.
Therefore, they must strive hard to control indirect Expenses.
Format of Redrafted Balance sheet

Cash in Hand
Cash at Bank
Marketable Securities
Total Absolute Liquid Assets
Add: Debtors
Bill Receivables
Outstanding Income
Short term Loan and Advances
Loose Tools
Total Liquid Assets/Quick Assets
Add: Inventory
Prepaid Expenses
Total Current Asset (A)
Sundry Creditors
Bills Payable
Outstanding Expenses
Income received in advance
BOD
Cash Credit
Provision for Depreciation
Provision for Taxation
Proposed Dividend
Unclaimed Dividend
Any other short-term Loans
Total Current Liabilities (B)
Net Working Capital – c(A-B)
Fixed Assets
Goodwill
Patents
Trademark
L and B
P&M
Furniture and Fixtures
Motor Vehicles
Less: Depreciation
Net Fixed Assets (D)
Capital Employed – E (C+D)
Less: Debentures
- Other long-term borrowings
Shareholders Fund
Less: PSC
Equity Shareholders Fund
Equity Shareholders Funds
represented by
- ESC
- R&S
Less: Fictitious Assets
Preliminary Expenses
Discount on issue of shares
Underwriting Commission
P&L Account (Dr. Ball)
2.
Redrafted Balance sheet

Cash in Hand 1,65,000
Cash at Bank 85,000
Marketable Securities 45,000
Total Absolute Liquid Assets 2,95,000
Add: Debtors 1,20,000
Bill Receivables 80,000
Outstanding Income 15,000
Total Liquid Assets/Quick Assets 5,10,000
Add: Inventory -
Prepaid Expenses 20,000
Total Current Asset (A) 5,30,000
Sundry Creditors 1,02,000
BOD 48,000
Provision for Taxation 90,000
Proposed Dividend 75,000
Unclaimed Dividend 50,000
Total Current Liabilities (B) 3,65,000
Net Working Capital – c(A-B) 1,65,000
Fixed Assets
- Goodwill 2,50,000
- P&M 3,75,000
- L&B 4,25,000
- F&F 2,50,000
- Long term Investment 2,00,000 15,00,000
Net Fixed Assets (D) 15,00,000

Capital Employed – E (C+D) 16,65,000
Less: 12% Mortgage Bonds 2,00,000
10% SIDBI loan 2,20,000
Total Long-term borrowings 4,20,000
(F)
Shareholders Fund 12,45,000
Less: PSC (3,00,000)
Equity Shareholders Fund 9,45,000

represented by
- ESC 5,00,000
- P&L account 2,00,000
- General Reserves 1,50,000
- Sinking Fund 1,00,000
- Reserve Fund 85,000 10,35,000
- Under writing Commission 60,000
- Preliminary Expenses 30,000
(90,000)
9,45,000
Comments:
➢ NWC = 5,30,000/3,65,000 = 1.45 times (Thump rule 2 times)
The Current Assets are far more lesser compared to the current
Liabilities as the Working Capital Ratio Stands at 1.45 times
Approximately. We should have invested more in Current Assets or have
reduced Current Liabilities.
➢ FAs to Capital Employed = 15,00,000/16,65,000 = 0.90 (Thump rule 75 –

80%)
The Investment in Fixed Asset is way more the thump rule proportion of
75 to 80% and therefore it is for this reason the company is suffering
from Liquidity issues.
➢ Proprietary Funds –
SHFs/Total Tangible Assets = 12,45,000/ (21,20,000-90,000-2,50,000)
= 17,80,000 = 0.69
Thumb Rule = 2/3
Money Invested by the Proprietors has a very good equity base which
could give better safety for the Funds invested by others in to the
Business.
Conclusion:
The Money invested by the proprietors in to the business is perfectly
fine, so does the number of investments in Fixed assets but only gray
area is liquidity that needs to be pulled out.
17TH Jan 2022
3.
H.W.
Redrafted Income Statement
Gross Sales -
Less: Sales Tax/Sales Return -
Net Sales -
Less: COGS (OS+ Net Purchases + DE – CS)
Gross Profit
- Office and Administration Expenses
- Selling & Distribution Expenses
OPBIT
Add: Non-Operating income
EBIT
Less: Interest
EBT
Less: IT
EAT
(-) PD
EAESHS
(-) ED
Retained Earnings
Format of Redrafted Balance sheet

Cash in Hand
Cash at Bank
Marketable Securities
Total Absolute Liquid Assets
Add: Debtors
Bill Receivables
Outstanding Income
Short term Loan and Advances
Loose Tools
Total Liquid Assets/Quick Assets
Add: Inventory
Prepaid Expenses
Total Current Asset (A)
Sundry Creditors
Bills Payable
Outstanding Expenses
Income received in advance
BOD
Cash Credit
Provision for Depreciation
Provision for Taxation
Proposed Dividend
Unclaimed Dividend
Any other short-term Loans
Total Current Liabilities (B)
Net Working Capital – C(A-B)
Fixed Assets
Goodwill
Patents
Trademark
L and B
P&M
Furniture and Fixtures
Motor Vehicles
Less: Depreciation
Net Fixed Assets (D)
Capital Employed – E (C+D)
Less: Debentures
- Other long-term borrowings
Shareholders Fund
Less: PSC
Equity Shareholders Fund
represented by
- ESC
- R&S
Preliminary Expenses
Discount on issue of shares
Underwriting Commission
P&L Account (Dr. Ballance)
Comparative Statement
4. Change Sales of 2009 to 150% of Cogs and change Rate of IT to 25%
Comparative Income Statement for 2008-2009
Particulars 2008(PY) 2009(CY) Absolute % Change
Change (
Sales 24,00,000 37,50,000 13,50,000 13,50,000/24,00,000
* 100 = 56.25%
Less: COGS 20,00,000 25,00,000 5,00,000 5,00,000/20,00,000
*100 = 25%
Gross Profit 4,00,000 12,50,000 8,50,000 8,50,000/4,00,000 *
100 = 212.5%
Less: Operating 40,000 1,25,000 85,000 85,000/40,000 * 100
Expenses = 212.5%
OPBIT/EBIT 3,60,000 11,25,000 7,65,000 7,65,000/3,60,000 *
100 = 212.5%
Less Interest - - - -
EBT 3,60,000 11,25,000 7,65,000 212.5%
Less: corporate (90,000) (2,81,250) 1,91,250 212.5%
Tax (25%)
EAT / EAESHS 2,70,000 8,43,750 5,73,750 212.5%
Comments:
➢ Sales have increased 56% in the year 2009 from the previous year, which
looks like the company has made good efforts in pushing up the revenue
➢ COGS, however have increased only 25% may be because of the Fixed
Cost Component or Bulk Operations.
➢ However, The Gross Profit, Operating Profit, Profit for Taxes shows and
increase of 212.5% because of Indirect expenses and corporate Tax have
been calculated at certain Percentage.
➢ Conclusion – The progress of Profitability during the Current Year from

the Previous Year is Convincingly Good but they should see that the
company is financially livered. Therefore, the Tax Liability can be
reduced.
5.
Comparative Income Statement for 2009-2010
Particulars 2009(PY) 2010(CY) Absolute % Change
Change (
Net Sales 7,85,000 9,00,000 1,15,000 1,15,000/7,85,000
* 100 = 14.65%
Less: COGS (4,50,000) (5,00,000) 50,000 50,000/4,50,000 *
100 = 11.11
Gross Profit 3,35,000 4,00,000 65,000 65,000/3,35,000 *
100 = 19.403
Less: Operating
Expenses
- General and 70,000 72,000 2,000 2,000/70,000 * 100
Administration = 2.85%
Expenses
- Selling 80,000 90,000 10,000 10,000/80,000 *
Expenses 100 = 12.50%
Total Operating 1,50,000 1,62,000 12,000 12,000/1,50,000 *
Expenses 100 = 8%
OPBIT/EBIT 1,85,000 2,38,000 53,000 53,000/1,85,000 *
100 = 28.648%
Less: Interest 25,000 30,000 5,000 5,000/25,000 * 100
= 20%
EBT 1,60,000 2,08,000 48,000 48,000/1,60,000 *
100 = 30%
Less: Income Tax 70,000 80,000 10,000 10,000/70,000 *
100 = 14.28%
EAT / EAESHS 90,000 1,28,000 38,000 38,000/90,000 *
100 = 42.2%
Note
Income tax is not taken in terms of percentage as the absolute value is already
given in question.
Comments:
➢ It is reveling that the company net sales have increased by 14.65%
whereas cost of goods sold has increased only by 11% which shows that
COGS is curtailed in a certain way
➢ Sales are increasing by 15%, whereas operating expenses increased by

only 8% which means there is good operating profit.
➢ No doubt the company is livered, the interest quantum is increased from

5
➢ Conclusion: Though the sales are increased by 15% the expenses are
curtailed; thus, it shows the company’s ability to cut down on expenses.
20th Jan 2022
6. Comparative B/S for 2009 & 2010
Particulars 2009 2010 Absolute % Change

Change
Cash in hand and 20,000 80,000 60,000 300
at bank
Bills Receivables 1,50,000 90,000 (60,000) (40)
Sundry Debtors 2,00,000 2,50,000 50,000 25
Stock 2,50,000 3,50,000 1,00,000 40
Prepaid Expenses - 2,000 2,000 -
Total Current 6,20,000 7,72,000 1,52,000 24.51
Assets (A)
Current Liabilities
- B/P 50,000 45,000 (5,000) (10)
- Securities 1,00,000 1,20,000 20,000 20
- Other 5,000 10,000 5,000 100
current
Liabilities
Total Current 1,55,000 1,75,000 20,000 12.90
Liabilities (b)
Net Working 4,65,000 5,97,000 1,32,000 28.38
Capital (A-B) … C
Fixed Assets
L&B 3,70,000 2,70,000 (1,00,000) (27.02)
P&M 4,00,000 6,00,000 2,00,000 50
Other FAs 25,000 30,000 5,000 20
Furniture and
Fixtures 20,000 25,000 5,000 25
Total Fixed Assets 8,15,000 9,25,000 1,10,000 13.49%
(D)
Capital Employed 12,80,000 15,22,0000 2,42,000 18.90
(C+D)
Less: LTBs
Debentures 2,00,000 3,00,000 1,00,000 50
Mortgage Loan 1,50,000 2,00,000 50,000 33.33 %
Total LTBs 3,50,000 5,00,000 1,50,000 42.85%
Shareholders Fund 9,30,000 10,22,000 92,000 9.89

ESHFS
ESC 6,00,000 8,00,000 2,00,000 33.33%
R&S 3,30,000 2,22,000 (1,08,000) (32.72)
Equity
Shareholders Fund 9,30,000 10,22,000 92,000 9.89%
Comments:
➢ Current Ratio
- 2020 – 4 times
- 2021 – 4.41 times
Thumb rule = 2:1
The current ratio in the year 2020 is 4:1 which is double the Thumb rule,
and in the year 2021 instead of reducing the ratio from 4 to 2, the
company has gone on to invest further money into current assets and
therefore the ratio has been pushed up to 4.41 rather than reducing it.
And that is why the increase in current asset approximately 25% that
proof very expensive for the company.
➢ Fixed Assets have been increased by Rs. 1,10,000 approximately 14%

which is a good move. However, the Capital Employed is increased by Rs.
2,42,000 out of which more is pushed in working capital than fixed
assets.
➢ The LTBs have increased by Rs. 1,50,000 and SHFs by 92,000 and that is
how the aggregate capital employed is increased by Rs. 2,42,000 from
the first year to the Second year.
➢ It is worth Noting that the company has no fictitious assets in its position
statement. However, The R&S have gone down by more than 30% which
means the business must have incurred losses in the current year.
➢ Conclusion: Company should disinvest in WC and invest the same into LT

assets. hence the earning capacity of the business can be increased.
7.
Comparative B/S for 2009 & 2010

Change
Cash at bank 50,000 1,50,000 1,00,000 200
Stock 4,50,000 6,50,000 2,00,000 44,44
Accounts 1,00,000 4,00,000 3,00,000 300
Receivables
-
Total Current 6,00,000 12,00,000 6,00,000 100
Assets (A)
Current Liabilities
- Creditors 1,00,000 3,00,000 2,00,000 200
Total Current 1,00,000 3,00,000 2,00,000 200

Liabilities (b)
Net Working 5,00,000 9,00,000 4,00,000 80
Capital (A-B) … C
Fixed Assets
L&B 6,00,000 12,00,000 6,00,000 100
P&M 4,00,000 8,00,000 4,00,000 100
Investments 4,00,000 5,00,000 1,00,000 25%
Total Fixed Assets 14,00,000 25,00,000 11,00,000 78.57
(D)
Capital Employed 19,00,000 34,00,000 15,00,000 78.94%
(C+D) …. E
Less: LTBs
Long Term Loans 2,00,000 5,00,000 3,00,000 150
Total LTBs …F 2,00,000 5,00,000 3,00,000 150
Shareholders Fund 17,00,000 29,00,000 12,00,000 70.58

(E-F)
Less: PSC 5,00,000 9,00,000 4,00,000 80%
ESHFS 12,00,000 20,00,000 8,00,000 66.67%

ESC 6,00,000 12,00,000 6,00,000 100
R&S 4,00,000 5,00,000 1,00,000 25
P&L A/C 2,00,000 3,00,000 1,00,000 50%
Total ESHFS 12,00,000 20,00,000 8,00,000 66.67%
Comments:
➢ Current Ratio
For 2008 – 6,00,000/1,00,000 = 6:1
For 2009 – 4,00,000/1,00,000 = 4:1
Thumb Rule: 2:1
The company has done a good job by reducing the Current Ratio from 6:1 to
4:1. However the company must reduce it further.
Fixed Asset to Long Term Fund Ratio =

For 2008 = 14,00,000/20,00,000 * 100 = 70%
For 2009 = 25,00,000/37,00,000 * 100 = 71.42%
To increase the profitability the company has to invest more into the Fixed
Assets.
However Long-term Loans have only increased only by 3,00,000, they must
have increase esc and. psc That is why capital employed has a whooping
increase of 15,00,000.
Conclusion: The company must disinvest in working capital and the same
money can be invested in the Fixed asset which can increase the Earning
Capacity of the firm.
8. Correct 2011 balance sheet make Reserve – 86,500 – HW

Change
Cash in hand and
at bank
Bills Receivables
Sundry Debtors
Stock
Prepaid Expenses -
Total Current
Assets (A)
Current Liabilities
- B/P
- Securities
- Other
current
Liabilities
Total Current
Liabilities (b)
Net Working
Capital (A-B) … C
Fixed Assets
L&B
P&M
Other FAs
Furniture and
Fixtures
Total Fixed Assets
(D)
Capital Employed
(C+D)
Less: LTBs
Debentures
Mortgage Loan
Total LTBs
Shareholders Fund
ESHFS
ESC
R&S
Equity
Shareholders Fund
Comment:
22nd Jan 2022
Common Size Statement
Format for 1 year data
Particulars Amount in Rs. %
Sales
Less: COGS
Gross Profit
OPBIT
9. Change the year to 2021
Common Size Income Statement for p Ltd and Q ltd ltd for the year ending
31st March 2021
Particulars P Ltd Q Ltd
Amount % Amount %
Net Sales 5,00,000 100 7,00,000 100
Less: COGS 3,25,000 65 5,10,000 73
Gross Profit 1,75,000 35 1,90,000 27
- Office Expenses 20,000 4 25,000 4
- S. Expenses 30,000 6 45,000 6
Total operating Expenses 50,000 10 70,000 10
OPBIT 1,25,000 25 1,20,000 17

Add: Non-Operating Income
- Misc. Income 20,000 4 15,000 2
1,45,000 29 1,35,000 19
Less: Non-operating Expenses - - - -
& Losses
EBIT 1,45,000 29 1,35,000 19
Less: Interest 25,000 5 30,000 4
EBT 1,20,000 24 1,05,000 15
Comment
➢ The GP rate in case of P ltd is more by 8 % even though the absolute
sales figures are different.
➢ Both the firm have incurred same percentage of operating expenses yet
p ltd OPBIT is better because P ltd has controlled the Direct Expenses.
➢ Both the firms are financially levered even though the percentage of
interest to sales is more in case of P ltd. financial risk in case of P ltd is
more.
➢ Conclusion: The profit earning capacity of P ltd is much better than q ltd
as it can control Direct Expenses better than Q ltd.
10
Common Size Income Statement of K.P.S ltd for the year ending 31st March
2012
Particulars Amount in Rs. %
Net Sales 18,50,000 100
Less: COGS 8,65,000 47
Gross Profit 9,85,000 53
- Administration Expenses 2,64,000 14
- S& Expenses 2,63,500 14
Total operating Expenses 5,27,500 28
OPBIT 4,57,500 25
Add: Non-Operating Income
- Profit on Sale of Investment 19,500 1%
4,77,000 26%
Less: Non-operating Expenses & Losses
- Loss on sale of assets (1,11,500) 6
EBIT 3,65,500 20
Less: Interest (15,000) 1%
EBT 3,50,500 19%
Less: Taxes 1,50,000 8%
EAT 2,00,500 11%
COGS = Net purchases + Opening Stock + Direct Expenses – Closing Stock

= 6,75,000+3,70,000 – 1,80,000 = 8,65,000
Comment:
➢ Gross Profit is good thus company’s ability to curtail COGS is good
➢ Total Operating Expenses is 28%, which is very much high than the ideal
20% which is resulting in huge cut down of profits.
➢ Though Non-operating Income is only 1%, the non-operating Expenses is
taking away profits or profit has been pulled down due to non-operating
expenses of 6%
➢ In future we can expect more profits as Loss on sale of Asset is not
recuring in nature
➢ The companies in ability are good to pay the interest
Fixed Interest Coverage Ratio = 20 times
Ideal is 6 to 7 times
➢ The company has an impressive gross profit of 53%, but the PAT to sales
ratio is very low that is 11%. That is because of High operating Expenses.
11
Common Size Balance Sheet of S& Co. and K & CO.
Particulars S& Co, K& Co.
Amount % Amount %
CAs 24,000 5 85,000 11
CLs 39,000 9 1,00,000 12
Negative NWC (15,000) (3) (15,000) (2)
Fixed Assets 4,14,000 95 7,23,000 89
Capital Employed 3,99,000 91 7,08,000 88
Less: LTBs 1,15,000 26 1,30,000 16
SHFs Funds 2,84,000 65 5,78,000 72
Less: PSC 1,20,000 27 1,60,000 20
ESHs Funds 1,64,000 37 4,18,000 52
ESHs Funds
Represented by
- Equity Share 1,50,000 34 4,00,000 50
Capital
- Reserves and 14,000 3 18,000 2
Surplus
Total 1,64,000 37 4,18,000 52
Comment:
12) H.W.
25th Jan 2022
Trend Percentages
13. X LTDs Trend Analysis of Sales, Stock and Taxable Income
Particulars Rs. in Lakhs Trend Percentage
2006 2007 2008 2009 2010 2006 2007 2008 2009 2010
Sales 1881 2340 2655 3021 3768 100 124 141 161 200
Stock 709 781 816 944 1154 100 110 115 133 163
PBT 321 435 458 527 672 100 136 142 164 209
Comments:
➢ The sales are made with the existing stock itself; inventory have not
been increased which is good.
14. XXX & Co. Trend Analysis

Particulars Rs. in Lakhs Trend Percentage
2009 2010 2011 2012 2009 2010 2011 2012
Sales 2,00,000 1,90,000 2,40,000 2,60,000 100 95 120 130
Less: 1,20,000 1,17,800 1,39,200 1,45,600 100 98 116 121
COGS
Gross 80,000 72,200 1,00,800 1,14,400 100 91 126 143
Profit
Less: 20,000 19,400 22,000 24,000 100 97 110 120
Expenses
Net Profit 60,000 52,800 78,800 90,400 100 88 131 151
Comments:
The direct and indirect expenses have been controlled very well which is
resulting in good net profit.
15. H.W
28th Jan 2022
Module 4 – Standard Costing / Variance Analysis
Material Cost Variances

MCV = (SQ for actual output * SP) – (AQ*AP)
Were,
SQ for actual output = Actual Output/ Standard Output * SQ
b. Material Price variance

MPV = (SP-AP) AQ
c. Material Usage Variance – happens because of the different quantity of

materials used.
MUV = (SQ for actual output – AQ) SP
d. Material Mix Variance

MMV = (RSQ-AQ) SP
Were RSQ (Revised Standard Quantity)

= Total Weight of Actual Mix / Total Weight of Standard Mix * SQ
1) From the following particulars, calculate (a) Material cost variance; (b)
Material price variance and (c) material usage variance
Standard Actual
Materials Units Price Units Price
A 2,020 2 2,160 2.40
B 820 3 760 3.60
C 700 4 760 3.80
Solution:
For Material A
Material Cost Variances
Were,
SQ for actual output = Actual Output/ Standard Output * SQ
MCV = (2020*2) – (2160*2.4)
= 4040 – 5,184
= Rs. 1,144 (A)
It is the negative deviation of actual cost to the standard cost.
MPV = (SP-AP) * AQ
= (2-2.40) *2,160
= Rs. 864 (A)
MUV = (SQ for AOP – AQ) SP
= (2020-2160)2
= Rs. 280(A)
MCV = MPV + MUV

= 864(A) + 280(A)
= Rs. 1,144 (A)
For Material B
= (820*3) – (760*3.60)
= 276 (A)
MPV = (SP-AP) AQ
= (3-3.60) 760
= 456 (A)
MUV = (SQ for actual Output – AQ) SP

= (820-760)3
= Rs. 180 (F)
Verification:
MCV = MPV + MUV
= 456(A) + 180 (F)
= 276 (A)
For Material C
= (700*4) – (760*3.80)
= 2,800 – 2,888
= 88 (A)
MPV = (SP-AP) AQ
= (4-3.80) 760
= Rs. 152 (F)
MUV = (sq for actual output – AQ) SP

= (700-760)4
= 240(A)
Verification:
MCV = MPV + MUV
= 152 – 240
= 88(A)
2) Given that the cost standards for materials consumption are 40 kgs at
Rs 10 per kg; compute (a) MCV; (b) MPV and (c) MUV when actuals are:
a) 48 kg at Rs 10 per kg
b) 40 kg at Rs 12 per kg
c) 48 kg at Rs 12 per kg
d) 36 kg for a total cost of Rs 360
Standard – 40kgs @ Rs. 10

a. Actual 48 Kgs @ 10

= (40-48) 10
= 80(A)
MPV = (SP-AP) AQ
= (10-10) 48kgs = nil

= (40*10) – (48*10) = 80 (A)
MCV = MUV + MPV

= 80(A) + Nil
= 80(A)
b. Actuals 40kgs @ Rs. 12 per kg

= (40-40)10 = Nil
MPV = (SP -AP) AQ

= (10-12)40
= - 80 (A)

= (40*10) – (40*12)
= 80(A)
MCV = MUV +MPV = 80(A)
c. Actual 48kgs @ Rs. 12

= (40-48)10 = 80(A)
MPV = (SP-AP) AQ
= (10-12)48 = 96(A)
= (40*10) – (48* 12)
= 400 – 576
= 176 (A)
MCV = MUV +MPV = 80(A) + 96(A) = 176(A)
d. 36 kg for the total cost of Rs. 360

Actual Cost = 360/36 = Rs. 10

= (40-36)10
= 40(f)
MPV = (SP-AP) AQ
= (10-10) 36 = Nil

= (40*10) – (36*10)
= 400-360 = 40. (F)
MCV = MUV +MPV = Nil + 40 = 40
3. A manufacturing concern has furnished the following information:

Material for 70 kg finished product is 100 kg
Price of materials – Re 1 per kg
Actual output – 2,10,000 kg
Actual material used – 2,80,000 kg
Cost of material – Rs 2,52,000
Calculate (a) material cost variance; (b) material price variance; (c) material
usage variance
Solution:
AQ = 2,80,000 kgs
AP = 2,52,000/2,80,000 = .90 per kg.
SP = 1/kg
Sq for AOP = AOP/SOP * SQ
= 2,10,000 / 70 * 100kgs
= 3,00,000 kgs
= (3,00,000 * 1) – (2,80,000 *.90)
= 3,00,000 – 2,52,000
= 48,000 (F)
MPV = (SP-AP) AQ
= (1-.90) 2,80,000
= 28,000 (F)
MUV = (SQ for Actual Output – AQ) SP

= (3,00,000 – 2,80,000) 1
= 20,000 (F)
MCV = MPV + MUV

= 28,000 + 20,000 = 48,000(F)
4. The standard material required to manufacture one unit of ‘X’ is 10 kg and

the standard price per kg of material is Rs 2.50. The cost account records
however revealed that 11,500 kg of materials costing Rs 27,600 were used for
manufacturing 1,000 units of ‘X’. Calculate material variances.
Solution:
SQ = 10kg
SP = Rs. 2.50
AOP = 1,000 kgs
AQ = 11,500
AP = 27,600/11,500 = 2.40
SQ for AOP = AOP/SOP * SQ
= 1,000/1unit * 10
= 10,000.
.

= (10,000 * 2.50) – (11,500 * 2.40)
= 2600(A)
MPV = (SP-AP) AQ
= (2.50-2.40) 11,500
= 1150(F)

= (10,000 – 11,500) 2.50
= 3,750 (A)
Verification:
MCV = MPV + MUV
= 1150 – 3,750
= 2,600 (A)
5. The standard materials for producing 100 units are 120 kgs. A standard price
of 50 paise per kg is fixed and 2,40,000 units were produced during the period.
Actual materials purchased was 3,00,000 kgs at a cost of Rs 1,65,000. Calculate
(a) material cost variance; (b) material price variance; (c) material usage
variance.
SOP = 100 units

SQ = 120 kgs
SP = .50 per kg.
AOP = 2,40,000 units
AQ = 3,00,000 kgs.
AP = 1,65,000/3,00,000= 0.55
= 2,40,000/100 * 120
= 2,88,000 kgs
= (2,88,000 * .50) – (3,00,000 *.55)

= Rs. 21,000 (A)
MPV = (SP-AP) AQ
= (0.50-0.55)3,00,000
= 15,000(A)

= (2,88,0000 – 3,00,000)0.50
= 6,000 (A)
Verification:
MCV = MPV + MUV
= 15,000 (A) + 6,000 (A)
= 21,000 (A)
6. From the following particulars compute (a) material cost variance; (b)
material price variance; (c) material usage variance
Quantity of materials purchased – 3,000 units

Value of materials purchased – Rs 9,000
Standard quantity of materials required per tonne of output – 30 units
Standard rate of material – Rs 2.50 per unit
Opening stock of materials – NIL
Closing stock of materials – 500 units
Output during the period – 80 tonnes.
Particulars Amount (In Rs.)

Opening Stock Nil
Purchases 3,000
3,000
Less: Closing Stock (500)
Consumption 2,500 – AQ
AQ = 2,500
AP = 9000/3000 = Rs. 3/Unit
SP – Rs. 2.50 per unit
SOP = 1 tons
SQ = 30 units
AOP = 80 tons
= 80/1 *30 units
= 2,400 Units

= (2,400*2.50) – (2,5000 * 3)
= 6,000 – 7,500
= 1,500 (A)
MPV = (SP-AP) AQ
= (2.50-3) 2,50,000
= 1,250(A)

= (2,400 – 2,500) 2.50
= 250(A)
Verification:
MCV = MPV + MUV
= 1,250 (A) + 250(A)
= 1,500 (A)
7. A furniture company uses sun mica tops for tables, calculate (a) MCV; (b)
MPV and (c) MUV
Standard quantity of sun mica per table – 4 sq ft

Standard price per sq ft of sun mica – Rs 50
Actual production of tables – 1,000
Sun mica actually used – 4,300 sq ft
Actual price of sun mica per sq ft – Rs 55
SQ = 4 sq.ft.
SOP = 1 unit.
SP = Rs. 50
AOP = 1,000
AP = Rs. 55
AQ = 4,300
= 1,000/1 * 4
= 4,000

= (4,000*50) – (4,300*55)
= 36,500 (A)
MPV = (SP-AP) AQ
= (50-55) 4,300
= Rs. 21,500 (A)

= (4,000-4,300)50
= 15,000 (A)
MCV = MPV + MUV

= 21,500(A) + 15,000 (A)
= 36,500 (A)
8. Calculate Material cost variance, Material price variance, Material usage

variance and Material mix variance from the following information:
The standard material cost to produce a tonne of chemical X is:

300 kg of Material A @ Rs 10 per kg
400 kg of Material B @ Rs 5 per kg
500 kg of Material C @ Rs 6 per kg
During the period, 100 tonnes of mixture X was produced from the usage
of:
35 tonnes of Material A at a cost of Rs 9,000 per tonne
42 tonnes of Material B at a cost of Rs 6,000 per tonne
53 tonnes of Material C at a cost of Rs 7,000 per tonne
Standard Actual
Material Qty (Kgs) Rate/Kg Amount Qty (Kgs) Rate/Kg Amount
(Rs.) (Rs.)
A 300 10 3000 35,000 9 3,15,000
B 400 5 2000 42,000 6 2,52,000
C 500 6 3000 53,000 7 3,71,000
Total, SIP 1,200 8,000 AIP - 9,38,000
1,30,000
Less: Standard Loss 200 kgs AL -

30,000
Kgs
SOP 1000 kgs AOP –
1,00,000
kgs
Working notes:
1. SQ for AOP = AOP/SOP * SQ
For Material A = 1,00,000/1000 * 300

= 30,000 kgs
For Material B = 1,00,000/1,000 * 400

= 40,000 kgs
For Material C = 1,00,000/1,000 * 500

= 50,000 kgs
2.
RSQ = Total Weight of Actual Mix/ Total Weight of Standard Mix * SQ
For A = 1,30,000/1,200 * 300 = 32,500 kgs.
For B = 1,30,000/1,200 * 400 = 43,333.33kgs.
For C = 1,30,000/1,200 * 500 = 54,166.67 kgs
MCV = (SQ for AOP * SP) – (AQ-AP)
For A = (30,000 * 10) – (35,000 *9)

= Rs. 15,000 (A)
For B = (40,000 * 5) – (42,000 * 6)

= 2,00,000 – 2,52,000
= 52,000 (A)
For C = (50,000 * 6) – (53,000 * 7)

= 3,00,000 – 3,71,000
= 71,000 (A)
Total MCV = 1,38,000 (A)
MPV = (SP-AP) AQ
For A = (10-9)35,000 = Rs. 35,000 (F)

For B = (5-6)42,000 = Rs. 42,000(A)
For C = (6-7)53,000 = Rs. 53,000 (A)
Total MPV = Rs. 60,000 (A)
For A = (30,000 – 35,000)10

= 50,000 (A)
For B = (40,000 – 42,000)5

= 10,000 (A)
For C = (50,000 – 53,000)6
= 18,000 (A)
Total MUV = Rs. 78,000 (A)

MMV = (RSQ – AQ) SP
For A = (32,500 – 35,000)10
= 25,000 (A)
For B = (43,333.33 – 42,000)5

= 6,667 (F)
For C = (54,166.67 – 53,000)6

= 7000 (F)
Total MMV = 11,333(A)
MYV = (AY – SY) SC/unit

= (1,00,000 – 1,08,333.33)8
= Rs. 66,667 (A)
SY = SOP/SIP * AIP
= 1,000/1200 * 1,30,000
= 1,08,333.33
SC/unit = Total Standard cost of Standard Quantity / Standard Output

=
Verification:
1. MCV = MPV +MUV
= 60,000 (A) + 78,000(A)
= 1,38,000 (A)
2. MUV = MMV+MYV
= 11,333 (A) + 66,667 (A)
= 78,000 (A)
3. MCV = MPV + MMV + MYV

= 60,000 (A) + 11,333(A) + 66,667(A)
= 1,38,000 (A)
4th Jan 2022

Material Mix Variance
MMV = (RSQ-AQ) SP
Were RSQ (Revised Standard Quantity)
= Total Weight of Actual Mix / Total Weight of Standard Mix * SQ
Verification: MUV = MMV + MYV
9.
Standard Actual
(Rs.) (Rs.)
A 40 75 3000 2,40,000 80 1,92,00,000
B 10 50 500 40,000 52 20,80,000
C 50 20 1000 2,20,000 21 46,20,000
Total, SIP 100 4,500 AIP – 2,59,00,000
5,00,000
Less: Standard Loss 10kgs AL -

80,000
SOP 90 kgs AOP –
4,20,000
Working Notes:
For Material A = 4,20,000/90 * 40 kgs
= 1,86,667
For Material B = 4,20,000/90 * 10 kgs
= 46,667 kgs
For Material C = 4,20,000/90 * 50

= 2,33,333 kgs
RSQ = Total Weight of Actual Mix/Total Weight of Standard Mix * SQ

For A = 5,00,000/100 * 40 = 2,00,000 kgs.
For B = 5,00,000/100 * 10 = 50,000 kgs.
For C = 5,00,000/100 * 50 = 2,50,000 kgs.
MCV = (SQ for AOP * SP) – (AQ * AP)

For A = (1,86,667 * 75) – (2,40,000 * 80)
= 1,40,00,025 - 1,92,00,000
= 51,99,975 (A)
For B = (46,667 * 50) – (40,000 * 52)

= 2,53,350 (F)
For C = (2,33,333 * 20) – (2,20,000 * 21)
= Rs. 46,660 (F)
Total MCV = 48,99,965(A)
MPV = (SP – AP) AQ
For A = (75 – 80) 2,40,000
= 12,00,000 (A)
For B = (50 – 52)40,000
= 80,000 (A)
For C = (20 -21)2,20,000
= 2,20,000 (A)
Total MPV = Rs. 15,00,000 (A)

For A = (1,86,667 – 2,40,000)75
= 39,99,975(A)
For B = (46,667-40,000)50
= 3,33,350 (F)
For C = (2,33,333 – 2,20,000)20

= 2,66,660 (F)
Total MUV = Rs. 33,99,965 (A)

For A = (2,00,000 – 2,40,000)75
= Rs. 30,00,000 (A)
For B = (50,000 – 40,000)50
= Rs. 5,00,000 (F)
For C = (2,50,000 – 2,20,000)20

= Rs. 6,00,000 (F)
Total MMV = 19,00,000 (A)

AY = AOP = 4,20,000
SY = 5,00,000 – 10% Standard Loss
= 5,00,000 – 50,000
= 4,50,000
OR
SY = SOP/SIP * AIP
= 90/100 * 5,00,000
= 4,50,000 Kgs.
SC/unit = Total Standard cost of Standard Quantity / Standard Output
= 4,500/90
= Rs. 50/kg.
MYV = (AY – SY) SC/unit

= (4,20,000 – 4,50,000)50
= Rs. 15,00,000 (A)
Verification:
MCV = MPV +MUV

= 15,00,000 (A) + 33,99,965(A)
= 48,99,965 (A)
MUV = MMV+MYV
= 19,00,000 (A) + 15,00,000 (A)
= 34,00,000 (A)
MCV = MPV + MMV + MYV

= 15,00,000 (A) + 19,00,000 (A) +15,00,000(A)
= 49,00,000 (A)
10.
Standard Actual
(Rs.) (Rs.)
I 62.5 40 2500 4,200 42 1,76,400
II 37.5 20 750 1,400 16 22,400
III 25 10 250 1,400 12 16,800
SIP 125 3,500 AIP – 2,15,600
7,000
SL 25 AL 1400
SOP 100 AOP 5,600
Working Notes:
1. SQ for AOP = AOP/SP * SQ
A = 5,600 /100 * 62.5

= 3,500 kgs
B = 5,600/100 * 37.5
= 2,100 kgs
C = 5,600/100 * 25
= 1400 kgs
2.
RSQ = Total Weight of Actual Mix / Total Weight of Standard Mix * SQ
For I = 7,000 / 125 * 62.5
= 3,500 kgs
For II = 7,000/125 * 37.5
= 2,100 kgs.
For III = 7,000/125 * 25

= 1,400 kgs.
MCV = (SQ for AOP * SP) – (AQ*AP)

For I = (3,500 * 40) – (4,200 *42)
= 1,40,000 – 1,76,400
= Rs. 36,400 (A)
For II = (2,100*20) – (1400 * 16)

= 42,000 – 22,400
= Rs. 19,600(F)
For III = (1400*10) – (1400 * 12)

= 1400 – 16,800
= 2,800 (A)
Total MCV = 19,600(A)
MPV = (SP – AP) AQ
For I = (40-42) 4,200
= 8,400 (A)
For II = (20-16)1400
= 5,600 (F)
For III = (10-12) 1400

= 2,800 (A)
Total MPV = 5,600 (A)
For I = (3,500 – 4,200) 40
= Rs. 28,000 (A)
For II = (2,100 – 1,400)20
= Rs. 14,000 (F)
For III = (1400 – 1400)10
=0
Total MUV = 14,000 (A)

For I = (3,500 – 4,200)40
= Rs. 28,000 (A)
For II = (2,100 – 1,400) 20

= 14,000 (F)
For III = (1400 – 1,400)10
=0
Total MMV = 14,000 (A)
MYV = (AY-SY) S/c Per unit

S/c Per unit = Total Standard cost of Standard Quantity / Standard Output
= 3,500/100 = 35/ kg
AY = AOP = 5,600 kgs

SY = SOP/SIP * AIP
= 100/125 * 7,000
= 5,600 kgs
MYV = (5,600 – 5,600) 35

=0
Verification:
MCV = MPV +MUV
= 5,600 (A) + 14,000 (A)
= 19,600 (A)
MUV = MMV+MYV
= 14,000 (A) + Nil
= 14,000 (A)

= 5,600 (A) + 14,000(A) + Nil
= 19,600 (A)
11
Standard Actual
(Rs.) (Rs.)
A 35 25 875 125 27 3,375
B 65 36 2,340 275 34 9,350
Total 100 kg 3,215 AIP - 400 12,725
kgs
Less: Standard Loss 5 AL - 35
SOP 95 AOP-365
Working Notes:
For Material A = 365/95 * 35 kgs

= 134.47 kgs
For Material B = 365/95 * 65 = 249.74 kgs.
2. RSQ = Total Weight of Actual Mix / Total Weight of Standard Mix * SQ
For Material A = 400/100 * 35 = 140 kgs

For Material B = 400/100 * 65 = 260 kgs.
Calculation of Variances
For Material A = (34.47 kgs * 25) – (125 kgs * 27)
= 3,361.75 – 3375
= Rs. 13.25 (A)
For material B = (249.74*36) – (275*34)

= 8990.64 – 9,350
= Rs, 359.36 (A)
Total = A+B
= Rs. 372.61 (A)
MPV = (SP-AP) AQ
For Material A = (25-27) 125
= Rs. 250(A)
For Material B = (36-34)275
= 550(F)
Total = Rs. 300 (F)

For Material A = (134.47 – 125) 25
= Rs. 236.75 (F)
For Material B = (249.74- 275) 36
= 909.36(A)
Total = Rs. 672.61(A)
MCV = MPV+MUV
= Rs. 300 (F) + 672.61(A)
= Rs. 372.61(A)

For Material A = (140-125) 25
= Rs. 375 (F)
For Material B = (260-275)36

= Rs. 540 (A)
Total = Rs. 165(A)
Material Yield Variance

MYV = (AY-SY) SC/unit
Were
Sc/unit = Total Standard cost of Standard Quantity / Standard Output
= Rs. 3215/95
= 33.84/kg.
AY = AOP = 365 kgs

SY = 400 – 5% S. loss
= 400-20kgs
= 380 kgs
Suppose if number of kgs is given but percentage is not given

Then
SY = SOP/SIP * Total AQ IP
= 95/100 * 400 kgs = 380 kgs
MYV = (365 kgs – 380 kgs)33.84/kg

= Rs. 507.60(A)
Verification:
MCV = MPV +MUV
= Rs. 300(F) + 672.61(A)
= Rs. 372.61(A)
Note
Do the verification for the total and not the material A and B separately
MUV = MMV+MYV
= Rs. 165 (A) + Rs. 507.60(A)
= Rs. 672.60 (A)
= Rs. 300(F) + Rs. 165(A) + Rs. 507.60(A)
= Rs. 372.60 (A)
11th Jan 2022

Format
Standard Actual
(Rs.) (Rs.)
A
B
Total
Less: Standard Loss AL -
SOP AOP-
Working Notes

MPV = (SP-AP) AQ
Verification:
1. MCV = MPV +MUV

Were
12
Standard Actual
(Rs.) (Rs.)
A 60 20 1200 105 20 2100
B 40 10 400 95 9 855
Total SIP 100 1600 AIP –200 2955
Less: Standard Loss 20 AL -35
SOP 80 AOP-165
Working Notes
For A = 165/80 * 60
= 123.75 Kgs
For B = 165/80*40
= 82.5 kgs

=
A = 200/100 * 60
= 120 kgs
B = 200/100 * 40
= 80 kgs

= 1600/80 kgs = 20 kgs
SY = SOP/SIP * AIP
= 80/100 * 200
= 160 Kgs
For A = (123.75*20) – (105*20)
= 375 (F)
For B = (82.5* 10) – (95* 9)
= Rs. 30(A)
Total = Rs. 345 (F)
MPV = (SP-AP) AQ
For A = (20-20) 105
= Nil
For B = (10 – 9)95

= 95(F)
Total MPV = 95 (F)

For A = (123.75 – 105)20
= 375(f)
For B = (82.5 – 95) 10
= 125(A)
Total MUV = Rs. 250 (F)

For A = (120 – 105)20
= 300(F)
For B = (80-95)10
= 150(A)
Total MMV = 150(F)

Were
MYV = (165 – 160)20

= 100 (F)
Verifications:
MCV = MPV + MUV
= 95(F) + 250(F)
= 345 (f)
MUV = MMV + MYV

= 150 + 100
= 250 (F)
= 95 + 150 + 100
= 375 (F)
13.
Format
Standard Actual
(Rs.) (Rs.)
P 450 20 9,000 10,000 19 1,90,000
Q 400 40 16,000 8,500 42 3,57,000
R 250 60 15,000 4,500 65 2,92,500
Total (SIP) 1,100 40,000 AIP - 8,39,500

23,000
Less: Standard Loss 100 AL -
3000
SOP 1,000 AOP-
20,000
Working Notes
For P = 20,000/1,000 * 450
= 9,000 kg.
For Q = 20,000/1,000 * 400

= 8000 kg.
For R = 20,000/1000 * 250
= 5000 kg.
For P = 23,000/1,100 * 450

= 9,409.09 kg.
For Q = 23,000/1,100 * 400

= 8,363.63 kg.
For R = 23,000/1,100 * 250

= 5,227.27 kg.
3. Sc/unit = Total Standard cost of Standard Quantity / Standard Output

= 40,000/1,000 = Rs. 40/kg
AY = AOP = 20,000 kgs
SY = SOP/SIP * AIP
= 1,000/1,100 * 23,000
= 20,909.09 kgs.

For P = (9,000 * 20) – (10,000 * 19)
= Rs. 10,000 (A)
For Q = (8,000 * 40) – (8,500 * 42)
= Rs. 37,000 (A)
For R = (5,000 * 60) - (4,500 * 65)
= Rs. 7,500 (F)
Total MCV = Rs. 39,500 (A)
MPV = (SP-AP) AQ
For P = (20-19)10,000 = Rs. 10,000 (F)
For Q = (40-42)8,500 = Rs. 17,000 (A)
For R = (60-65)4,500 = Rs. 22,500 (A)
Total MPV = 29,500 (A)

For P = (9,000 – 10,000)20 = Rs 20,000 (A)
For Q = (8,000 – 8,500)40 = Rs. 20,000 (A)
For R = (5,000 – 4,500)60 = Rs 30,000 (F)
Total MUV = 10,000 (A)

For P = (9,409.09 – 10,000)20
= Rs. 11,818.2(A)
For Q = (8,363.64 – 8,500)40 = Rs. 5,454.4(A)
For R = (5227.27 – 4,500)60 = Rs. 43,636.2 (F)
MMV = Rs. 26,363.6 (F)
MYV = (AY – SY) Sc/unit

= (20,000 – 20,909.09)40
= Rs. 36,363.6 (A)
Verification:
MCV = MPV +MUV
= 29,500(A) + 10,000(A)
= 39,500 (A)
MUV = MMV + MYV

= 26,363.6 (F) + 36,363.6 (A)
= 10,000 (A)

= 29,500 (A) + 26,363.6(F) + 36,363.6(A)
= 39,500 (A)
14.
Standard Actual
(Rs.) (Rs.)
A 500 6 3,000 400 6 2,400
B 400 3.75 1,500 500 3.60 1,800
C 300 3 900 400 2.80 1,120
Total (SIP) 1,200 5,400 AIP - 5,320

1,300
Less: Standard Loss 120 AL – 220
SOP 1,080 AOP-
1,080
Working Notes:
WN1 –
For A = 1,080/1,080 * 500 = 500 kg
For B = 1,080/1,080 * 400 = 400 kg
For C = 1,080/1,080 * 300 = 300 kg.
WN2:
RSQ = AIP/SIP * SQ
For A = 1,300/1,200 * 500 = 541.67 kg.
For B = 1,300/1,200 * 400 = 433.33kg.
For C = 1,300/1,200 * 300 = 325 kg.
WN3: Sc/unit = Total Standard cost of Standard Quantity / Standard Output

= 5,400/1,080 = Rs. 5/kg.
AY = AOP = 1,080
SY = SOP/SIP * AIP
= 1,080/1,200 * 1,300
= 1,170
MCV = (SQ for AOP *SP) – (AQ * AP)

For A = (500 * 6) – (400 * 6)
= Rs. 600 (F)
For B = (400*3.75) - (500 * 3.60)
= 1,500 – 1,800
= Rs. 300 (A)
For C = (300 * 3) – (400*2.80)

= 900 – 1,120
= 220 (A)
Total MCV = 80(F)
MPV = (SP-AP) AQ
For A = (6-6)400 = Nil
For B = (3.75-3.60)500 = Rs. 75(F)
For C = (3-2.80)400 = Rs. 80(F)
Total MPV = Rs. 155 (F)

For A = (500 – 400)6 = Rs. 600(F)
For B = (400 – 500)3.75 = Rs. 375(A)
For C = (300 – 400)3 =Rs. 300 (A)
Total MUV = Rs. 75(A)

For A = (541.67 – 400)6
= Rs. 850.02(F)
For B = (433.33 – 500)3.75
= Rs. 250.01(A)
For C = (325-400)3 = Rs. 225 (A)
Total MMV = 375.01(F)
MYV = (AY-SY) Sc/unit

= (1,080 – 1,170)5
= Rs. 450 (A)
Verifications:
MCV = MPV + MUV
= 155(F) + 75(A)
= Rs. 80 (F)
MUV = MMV + MYV

= 375.01(F) + 450(A)
= 75(A)

= 155(F) + 375(F) + 450(A)
= 80(F)
12th Feb 2022
15.
Actual Material Consumed = 830
Material Consumed = 1190
Standard Actual
(Rs.) (Rs.)
A 40 4 160 830 4.25 3527.5
B 60 3 180 1190 2.5 2975
Total SIP 100 340 AIP – 6,502.5
2020
Less: Standard Loss (15) AL – 320
SOP 85 AOP-
1,700
Working Notes
For A = 1,700/85 * 40 = 800 kgs
For B = 1,700/85 * 60 = 1,200 kgs.
2. RSQ = AIP/SIP * SQ
For A = 2020/100 * 40 = 808 kg.
For B = 2020/100 * 60 = 1,212 kg.

= 340/85 = Rs. 4/unit
AY = AOP = 1700 kg
SY = SOP/SIP * AIP
= 85/100 * 2020
= 1717 kg.
MCV = (SQ for AOP * SP) – (AQ*AP)
For A = (800*4) – (830*4.25)

= Rs. 327.5(A)
For B = (1200 *3) – (1190 * 2.5)

= Rs. 625 (F)
Total MCV = Rs. 297.50 (F)
MPV = (SP -AP) AQ

For A = (4-4.25)830 = Rs. 207.5(A)
For B = (3-2.5)1190 = Rs. 595(F)
Total MPV = Rs. 387.50 (F)

For A = (800 – 830)4 = Rs. 120(A)
For B = (1,200 – 1,190)3 = Rs. 30 (F)
Total MUV = Rs. 90 (A)
MMV = (RSQ-AQ) SP
For A = (808-830)4
= Rs. 88 (A)
For B = (1,212 – 1,190)3
= Rs. 66 (F)
Total MMV = 22 (A)
MYV = (AY – SY) Sc/unit

= (1700 -1,717) 4
= Rs. 68(A)
Verifications:
MCV = MPV + MUV
= 387.50(F) + 90(A)
= 297.50(F)
MUV = MMV + MYV

= 22(A) + 68(A)
= 90(A)

= 387.50(F) + 22(A) + 68(A)
= 297.50 (F)
14th Jan 2022
Labor Variances
LCV, LRV, LEV
LCV = (ST for AOP * SR) – (AT*AR)
ST for AOP = AOP/SOP * ST
LRV = (SR-AR) AT
LEV = (ST for AOP – AT) SR
Verification:
LCV = LRV + LEV
16.
SR = Rs. 10 Per hour

ST / ST for AOP (because it does not give you the output) = 300
AR = Rs.12
AT = 200

= (300*10) – (200*12)
= 3,000 – 2,400
= Rs. 600 (F)
LRV = (SR-AR) AT
= (10-12)200
= 400 (A)

= (300-200)10
= 1000(F)
Verification:
LCV = LRV + LEV

= 400 (A) + 1000 (F)
= 600 (F)
17.
Correction IN Question Direct wages for A = 2,58,300
B = 1,94,300
Calculation of AR
Department A Dept. B
Actual Wages 2,58,300 1,94,300
Actual Hours 8,200 5,800
A.R (Wages/AT) 31.50 / hour 33.50/hr.
SR 30 35
ST FOR AOP 8000 hours 6,000 hours
For A = (8,000 * 30) – (8,200 *31.50)

= 2,40,000 – 2,58,300
= 18,300(A)
For B = (6,000 * 35) – (5,800 * 33.50)

= 2,10,000 – 1,94,300
= 15,700 (F)
Total = Rs. 2,600 (A)

LRV = (SR-AR) AT
For A = (30-31.50) 8,200

= 12,300(A)
For B = (35-33.5) 5,800

= 8,700 (F)
Total = 3,600 (A)
For A = (8,000 – 8,200)30

= Rs. 6000(A)
For B = (6,000 – 5,800) 35

= Rs. 7000(F)
Total Rs. 1000(F)
Verification:
LCV = LRV + LEV

= 3,600(A) + 1000(f) = 2,600(A)
18.
ST (Worker Days) = no for workers*no. of working days in a month

= 50 * 20 = 1,000 worker days
Total Wages = Rs. 280 * 50 = Rs. 14,000

SR = 14,000/1000
= Rs. 14 / Worker Day
AT = 60 * 22 = 1,320 worker days
Total Actual Wages = 330 * 60 days

= 19,800 Rs.
AR = 19,800/1,320
= Rs. 15/ Worker Day

= 2,500 /2,000 * 1,000 worker days
= 1,250 worker days

= (1,250 * 14) – (1,320 * 15)
= 17,500 – 19,800
= 2,300 (A)
LRV = (SR-AR) AT
= (14-15) 1320
= 1320 (A)

= (1,250 – 1,320)14
= 980 (A)
Verification:
LCV = LRV + LEV

= 1320(A) + 980(A)
= 2,300 (A)
19. SR = Rs. 0.50 Per Hour
SOP = 1 unit
ST = 10 Hours
AOP = 500 units
Actual Time = 6000 hours
Actual Cost = 2,400
Actual Rate = Actual Cost / Actual Time
= 2400/6,000
= Rs. 0.4
= 500/1 * 10 = 5,000
LCV = (ST for AOP * SP) – (AT*AR)

= (5,000 * 0.50) – (6000 * 0.4)
= 2,500 – 2,400
= 100 (F)
LRV = (SR- AR) AT

= (0.50 – 0.40) 6,000 6
= Rs. 600 (F)

= (5,000 – 6,000) 0.50
= Rs. 500 (A)
Verification:
LCV = LRV + LEV
= 600(F) + 500 (A)
= 100 (F)
20. The standard and actual labour force required for completing a job
taking one week period is given as follows:
Standard Actual
Category of No of Weekly Rate No of Weekly Rate
workers workers (Rs) workers (Rs)
Skilled 45 50 48 55
Semi – 50 40 45 40
skilled
Calculate (a) Labour Rate Variance; (b) Labour Efficiency Variance; (c) Labour
Cost Variance
Solution:
Standard Actual
Category No of Weekly Amount No of Weekly Amount
of workers Rate workers Rate
workers (Rs) (Rs)
Skilled 45 50 2,250 48 55 2,640
Semi – 50 40 2,000 45 40 1,800
skilled
For Skilled = (45* 50) – (48 * 55)
= 2,250 – 2,640
= Rs. 390 (A)
For Semi Skilled = (50*40) – (45*40)

= 2,000 – 1,800
= 200 (F)
Total LCV = 390(A) + 290(F)

= 190(A)
LRV = (SR- AR) AT

For Skilled = (50-55)48
= Rs. 240 (A)
For Semi Skilled = (40-40) 45 = Nil

Total LRV = Rs. 240 (A)

For Skilled = (45-48) 50
= 150 (A)
For Semi Skilled = (50 -45)40

= 200 (F)
Total LEV = 50(F)
Verification
LCV = LRV + LEV
= 240 (A) + 50(F)
= 190 (A)
21.
ST for M = 15 hours
ST for N = 20 hours
SR for each = Rs. 5
AOP for M = 10,000 Units

AOP for N = 15,000 Units
Total Labor Hours = 4,50,500 Hours (AT)

Actual Wage Bill = 23,00,000 (ACAT)
12,000 Hours @ Rs. 7 84,000 Hours

9,400 Hours @ Rs. 7.50 70,500 Hours
Balance 4,29,100 Hours @ Rs. 5 21,45,500
23,00,000

For M = 10,000/1 * 15 Hours = 1,50,000 Hours
For N = 15,000/1 * 20 Hours = 3,00,000 Hours
Total = 4,50,000 Hours.
LCV = (ST for AOP * SR) or SC for ST – Ac for AT

= (4,50,000 * 5) – 23,00,000
= 22,50,000 – 23,00,000
= Rs. 50,000 (A)
LRV = (SR-AR) AT
= (5-7) 12,000 + (5-7.50) 9,400 + (5-5)4,29,100
= 24,000 (A) + 23,500 (A) + Nil
= 47,500 (A)
LEV = (ST for AOP – AT) ST

= (4,50,000 – 4,50,500)5
= 2,500 (A)
Verification:
LCV = LRV + LEV
LCV = 47,500 (A) + 2,500 (A)
LCV = 50,000 (A).
Notes:
LEV have three Further Classifications
➢ Gross Labor Efficiency Variance (GLEV)
➢ Net Labor Efficiency Variance (NLEV)
➢ Ideal Time Variance (ITV) (always Calculated Negative because it is
wastage of time)
GLEV = (ST for AOP – AT) SR

NLEV = (ST for AOP – AT worked) SR
Where AT Worked = AT – IT
LITV = IT * SR
Verification
GLEV = NLEV + LITV
22.
ST = 8000 hours (ST for AOP)
SR = Rs. 2.25 per Hour
Ideal Time = 100 hours
AT = 50*25*7
= 8,750 Worker Hours
AR = Rs. 21,875/8,750 Hours
= Rs. 2.5
AT Worked = AT – IT
= 8,750 – 100
= 8,650 Hours
LCV = (ST for AOP *SR) – (AT – AR)

= (8,000 * 2,25) – (8,750*2.50)
= 18000 – 21,825
= Rs. 3875 (A)
LRV = (SR-AR) AT
= (2.25-2.50)8,750
= 2187.50 (A)

= (8,000 – 8,750)2.25
= Rs. 1687.5 (A)
NLEV = (ST for AOP – AT Worked) SR

= (8,000 – 8,650) 2.25
= Rs. 1462.50 (A)
LITV = IT * SR
= 100 * 2.25
= 225 (A)
Verifications:
LCV = LRV + GLEV
= 2187.50(A) + 1,687.50(A)
= 3,875(A)
GLEV = NLEV + LITV

= 1462.50 (A) + 225(A)
= 1,687.50(A)
23.
St = 5,000
Sr = Rs. 4 per hour
AT = 6,000
AR = 3.5 per hour
AT worked = AT – IT
= 6,000 – 300
= 5,700 hours.

= (5,000 * 4) – (6,000 *3.5)
= 20,000 – 21,000
= 1,000 (A)
LRV = (SR-AR) AT
= (4-3.5)6,000
= 3,000 (F)

= (5,000 – 6,000)4
= 4,000 (A)

= (5,000 – 5,700)4
= 2,800 (A)
LITV = IT * SR
= 300 * 4
= 1,200 (A)
Verification:
LCV = LRV + GLEV
= 3,000 (f) + 4,000 (A)
= 1,000 (A)
GLEV = NLEV + LITV

= 2,800(A) + 1,200(A)
= 4,000 (A)
24.
SR = Rs. 6
AOP = 9,00,000 units
AR = Rs. 6.50
SOP = 100 units
AT = 200*50
= 10,000 Worker Days
Ideal Time = 100 worker Hours
Standard Time = 1 day
AT worked = AT – IT
= 10,000 – 100
= 9,900 Worker Days.
Working Notes
= 9,00,000/100 * 1
= 9,000 worker Day
LCV = (St for AOP * SR) – (AT – AR)

= (9,000 * 6) – (10,000*6.50)
= 54,000 – 65,000
= 11,000 (A)
LRV = (SR-AR) AT
= (6-6.50)10,000
= 5,000 (A)

= (9,000 – 10,000) 6
= 6,000 (A)
NLEV = (St for AOP – AT Worked) SR

= (9,000 – 9,900)6
= 5,400(A)
LITV = IT*SR
= 100 * 6
= 600(A)
Verification:
LCV = LRV + GLEV
= 5,000(A) + 6,000(A)
= 11,000 (A)
GLEV = NLEV + LITV

= 5,400 (A) + 600(A)
= 6,000(A)
25.
SOP = 25 Units
SR = 6
AOP = 1040 units
ST = 100 hours
AT = 42 * 100 = 4,200 Hours
IT = 4,200 * 5% = 210 hours
AT worked = 4,200 – 210 = 3,990 hours.
St for AOP = AOP/SOP * 100

= 1,040/25 * 100
= 4,160.

= (4,160 *6) – [(420*6.20) +(1260*6) +(2,520*5.70)
= 24,960 – (2604+7560+14,364)
= 24,960 – 24,528
= 432(f)
LRV = (SR-AR) AT
= (6-6.20)420 + (6-6)1260 + (6-5.70)2,520
= 84(A) + Nil + 756(F)
= 672 (F)

= (4,160 – 4,200)6
= Rs. 240 (A)

= (4,160 – 3,990)6
= 1,020 (F)
LITV = IT * SR
= 210 * 6
= 1,260(A)
Verification
LCV = LRV + GLEV
= 672(F) – 240(A)
= 432(F)
GLEV = NLEV + LITV

= 1,020(F) - 1,260(A)
= 240 (A)
Gang Composition Variance:

GCV = (Revised Standard Time – Actual Time) Standard Rate
Were,
Revised Standard Time = Total Time Taken in Actual Mix * Standard Time
Total Time Taken in Standard Mix
Labor Yield Variance
LYV = (Actual Yield – Standard Yield) Standard Cost per Hour
26.From the following data of a manufacturing concern

Budgeted labor composition for producing 100 articles
20 men @ Rs 125 per hour for 25 hours
30 women @ Rs 110 per hour for 30 hours
Actual labor composition for producing 100 articles
25 men @ Rs 150 per hour for 24 hours
25 women @ Rs 120 per hour for 25 hours
Calculate (a) labour cost variance; (b) labour rate variance; (c) labour
efficiency variance; (d) labour mix variance.
Solution:
Category Standard Actual
Men (20*25) = 500 500 @ 125/hr. = 62,500 (25*24) = 600 600 @150/hr= 90,000
Women (30*30) = 900 900 @ 110/hr. = 99,000 (25*25) =625 625@120/hr. = 75,000
1,400 1,61,500 1,225 1,65,000

Note:
Since AOP and SOP are same we don’t need to calculate ST for AOP as
ST = ST for AOP
RST = Total time Taken in Actual Mix * Standard Time

Total time taken in Standard Mix
Men = 1,225/1400 * 500 = 437.5 hours.

Women = 1,225/1,400 * 900 = 787.5 Hours.
Total RST = 437.5 + 787.5

= 1,225 hours.
GCV = (RST – AT) SR

For Men = (437.5 – 600) 125 = 20312.5 (A)
For Women = (787.5 – 625)110 = 17,875 (F)
Total GCV = 20,312.5(A) + 17,875(F)
= 2437.5 (A)
LCV = (ST for AOP * SR) – (AT * AR)

For Men = (500 * 125) – (600 * 150)
= 62,500 – 90,000
= 27,500 (A)
For Women = (900 *110) – (625 * 120)

= 99,000 – 75,000
= 24,000 (F)
LRV = (SR – AR) AT

For Men = (125 – 150) 600
= 15,000 (A)
For Women = (110-120)625 = 6,250 (A)

Men = (500 – 600)125 = 12,500 (A)
Women = (900-625)110 = 30,250(F)
Total LEV = 17,750 (F)
LYV = (AY-SY) SC/Unit
27.

Time Rate Amount Time Rate Amount
Skilled 2250 60 1,35,000 2240 70 1,56,800
Semi-Skilled 1,350 40 54,000 960 50 48,000
Unskilled 1,800 30 54,000 2,560 20 51,200
5,400 2,43,000 5,760 2,56,000
ST for AOP is same as ST as there Is no AOP and SOP , no need of

calculating.
RST = Total Time Taken in AM/ Total Time Taken in SM * ST
For Skilled = 5,760/5,400 * 2250 = 2,400
For Semi Skilled = 5,760/5,400 * 1,350 = 1,440
For Unskilled = 5,760/5,400 * 1800 = 1,920

For Skilled = (2,250 * 60) – (2,240 * 70)
= 21,800 (A)
For Semi Skilled = (1,350 * 40) – (960 * 50) = 6,000 (F)
For Unskilled = (1,800 * 30) – (2,560 * 20) = 2,800 (F)
Total LCV = 13,000 (A)
LEV = (ST For AOP - AT) AR
For Skilled = (2,250 – 2,240)60 = 600(F)

For Semi Skilled = (1,350 – 960)40 = 15,600(F)
For Unskilled = (1,800 – 2,560)30 = 22,800(A)
Total LEV = 6,600 (A)
LRV = (SR- AR) AT

For Skilled = (60-70) 2,240 = 22,400 (A)
For Semi Skilled = (40-50)960 = 9,600 (A)
For Unskilled = (30-20)2,560 = 25,600 (F)
Total LRV = 6,400 (A)
GCV = (RST-AT) SR
For Skilled = (2,400 – 2,240) 60 = 9,600 (F)
For Semi Skilled = (1,440 – 960)40 = 19,200 (F)
For Unskilled = (1,920 – 2,560)30 = 19,200(A)
Total GCV = 9,600 (F)
Sc/Unit = 2,43,000/5,400 = Rs. 45 Per Unit
LYV = (Total ST – Total AT) Sc/unit

= (5,400 – 5,760)45
= 16,200 (A)
Verification:
LEV = GCV + LYV
= 9,600(F) + 16,200 (A)
= 6,600 (A)
28.
Men 1200 80 96,000 1,600 70 1,12,000
Women 600 60 36,000 400 65 26,000
Boys 400 40 16,000 200 30 6,000
2,200 1,48,000 2,200 1,44,000
GCV = (RST – AT) AR

For Men = (1,200 -1,600)80 = Rs. 32,000 (A)
For Women = (600-400)60 = 12,000 (F)
For Boys = (400 – 200)40 = 8000 (F)
Total GCV = 12,000 (A)
LYV = (AY-SY) Sc/Unit

= (1,600 – 2,000)74
= 29,600 (A)

For Men = (960 * 80) – (1,600 * 70)
= 76,800 – 1,12,000 = 35,200 (A)
For Women = (480 * 60) – (400 *65)

= 28,800 -26,000 = 2,800 (F)
For Boys = (320 * 40) – (200 * 30)
= 12,800 – 6,000
= 6,800 (F)

For Men = (80-70)1,600 = 16,000 (F)
For Women = (60 -65)400 = 2,000 (A)
For Boys = (40 -30)200 = 2,000 (F)
Total LRV = 16,000 (F)
GLEV = (ST for AOP – AT) AR

For Men = (960-1,600)80 = 51,200 (A)
For Women = (480 -400)60 = 4,800 (F)
For Boys = (320 – 200)40 = 4,800(F)
Total GLEV = 41,600(A)
NLEV = (ST for AOP – AT worked) AR

For Men = (960 – 1,440)80 = 38,400 (A)
For Women = (480 -360)60 = 7,200(F)
For Boys = (320 -180)40 = 5,600 (F)
Total NLEV = 25,600 (A)
LITV = IT * SR
For Men = 160 * 80 = 12,800(A)
For Women = 40 * 60 = 2,400(A)
For Boys = 20 *40 = 800(A)
Total LITV = 16,000 (A)
Verification:
LCV = LRV + LRV
= 16,000 (F) + 41,600(A)
= 25,600 (A)
GLEV = NLEV + LITV

= 25,600(A) + 16,000 (A)
= 41,600 (A)
GLEV = GCV + LYC

= 12,000 (A) + 29,600 (A)
= 41,600 (A)
Working Notes:
1. ST for AOP = AOP/SOP *ST
Men = 1,600/2,000 * 1,200 = 960 hrs.
Women = 1,600/2,000 * 600 = 480 hrs.
Boys = 1,600/2,000 * 400 = 320 hrs.
2. RST = Total Time Taken in AM/Total Time Taken in SM * ST
For Men = 2,200/2,200 * 1,200 = 1,200 hrs.
For Women = 2,200/2,200 * 600 = 600 hrs.
For Boys = 2,200/2,200 * 400 = 400hrs.
3. Ideal Time
For Men = 40 * 4 = 160 hrs.
For Women = 10 * 4 = 40 Hrs.
For Boys = 5 * 4 = 20 hrs.
4. AT Worked = AT – IT
For Men = 1600-160 = 1,440 hrs.
For Women = 400 – 40 = 360 hrs.
For Boys = 200 – 20 = 180 hrs.
5. AY = AOP = 1,600 Units

SY = SOP = 2,000 units.
6. SC per Unit = 1,48,000/2,000 = Rs. 74 per Unit.
Extra Question:
Q. Using the Following Data, Calculate LCV, LRV, LEV, LITV
Standard Hours = 12,000
Standard Wage Rate = Rs. 5 Per Hour
Actual Hours = 12,500
Actual Wage Rate = Rs. 4.75 per hour
ST = 12,000
SR = 5
AT = 12,500
AR = 4.75
IT = 550 hours
At worked = AT – IT
= 12,500 – 550
= 11,950 hours
LCV = (St for AOP *SR) – (AT*AR)

= (12,000 * 5) – (12,500*4.75)
= 60,000 – 59,375
= 625 (F)
LRV = (SR-AR) AT
= (5-4.75)12,500
= 3,125 (F)

= (12,000 – 12,500)5
= 2,500 (A)
NLEV = (ST for AOP – AT worked) ST

= (12,000 – 11,950) 5
= Rs. 250 (F)
LITV = IT *SR
= 550 * 5
= 2,750(A)
Verification:
LCV = LRV + GLEV
= 3,125(F) - 2,500 (A)
= 625(F)
GLEV = NLEV + LITV

= 250(F) – 2,750(A)
= 2,500 (A)
Q. Using the following Information. Calculate LCV, LRV, GLEV, NLEV, LITV.
Also verify your answer.
Standard Hours = 4,000
Standard Wage Rate = Rs. 30 per Hour
Actual Hours = 5,000
Actual Wage Bill = Rs. 1,25,000
Time Lost due to Machinery Breakdown = 200 hours
ST = 4,000
SR = 30
AT = 5,000
AR = 1,25,000/5,000 = 25
IT = 200 Hours
AT worked = 5,000 – 200 = 4,800 hours.

= (4,000 * 30) – (5,000 * 25)
= 1,20,000 – 1,25,000
= 5,000 (A)

= (30-25)5,000
= 25,000 (F)

= (4,000 – 5,000)30
= 30,000 (A)

= (4,000 – 4,800)30
= 24,000 (A)
LITV = IT * SR
= 200 * 30
= 6,000 (A)
Verification:
LCV = LRV + GLEV
= 25,000 (F) – 30,000 (A)
= 5,000 (A)
GLEV = NLEV + LITV

= 24,000 (A) + 6,000 (A)
= 30,000 (A)
Q. A gang of Workers normally consist of 60 men, 30 women and 20 boys.

They are being paid at a standard hourly rate as under. Men – Rs. 160,
Women – Rs. 120, Boys – Rs. 80. In a normal working week of 40 hrs.
The gang is expected to produce 2,000 units of output. During the week
ended 31st December 2021 the gang consisted of 80men, 20 women & 10
boys. The actual Wages paid where Rs. 140, Rs 130 & Rs. 60 respectively. 5
hours per worker was lost due to abnormal ideal time. 1800 units where
produced . Calculate all labor variances with due verification.
Solution:
Men 2,400 160 3,84,000 3,200 140 4,48,000
Women 1,200 120 1,44,000 800 130 1,04,000
Boys 800 80 64,000 400 60 24,000
4,400 5,92,000 4,400 5,76,000
Working Notes:
WN1. ST for AOP = AOP/SOP * ST
For Men = 1800/2,000 * 2,400 = 2,160 Hours.
For Women = 1800/2,000 * 1,200 = 1,080 Hours.
For Boys = 1800/2,000 * 800 = 720 Hours.
WN2. RST =
Total Time Taken in Actual Mix/Total Time Taken in Standard Mix * ST
For Men = 4,400/4,400 * 2,400 = 2,400
For Women = 4,400/4,400 * 1,200 = 1,200
For Boys = 4,400/4,400 * 800 = 800
WN3. Ideal time

For Men = 5 *80 = 400 hours
For Women = 5 * 20 = 100 hours.
For Boys = 5 * 10 = 50 hours.
WN4. AT worked = AT – IT
For Men = 3,200 – 400 = 2,800
For Women = 800 -100 = 700
For Boys = 400 -50 = 350
SC/unit = 5,92,000/2,000 = 296/unit

For Men = (2,160 * 160) – (3,200 * 140) = 1,02,400 (A)
For Women = (1,080 * 120) – (800 * 130) = 25,600 (F)
For Boys = (720 * 80) – (400 * 60) = 33,600 (A)

For Men = (2,160 – 3,200)160 = 1,66,400 (A)
For Women = (1,080 – 800) 120 = 33,600(F)
For Boys = (720 – 400)80 = 25,600(F)
Total LEV = 1,07,200 (A)

For Men = (160 – 140)3,200 = 64,000 (F)
For Women = (120 – 130)800 = 8,000 (A)
For Boys = (80-60)400 = 8,000 (F)
Total LRV = 64,000 (F)

For Men = (2,160 – 2,800)160 = 1,02,400(A)
For Women = (1,080 – 700)120 = 45,600(F)
For Boys = (720 – 350)80 = 29,600(A)
Total NLEV = 27,200(A)

LITV = IT * SR
For Men = 400 * 160 = 64,000 (A)
For Women = 100 * 120 = 12,000 (A)
For Boys = 50 * 80 = 4,000 (A)
Total LITV = 80,000 (A)
LYV = (AY – SY) Sc/unit

= (1,800 – 2,000)296 = 59,200(A)
GCV = (RST – AT) SR

For Men = (2,400 – 3,200)160 = 1,28,000 (A)
For Women = (1,200 – 800)120 = 48,000 (F)
For Boys = (800 – 400) 80 = 32,000 (F)
Total GCV = 48,000 (A)
Verification:
LCV = LEV + LRV
= 1,07,200 (A) + 64,000 (F)
LEV = GCV + LYV

= 48,000 (A) + 59,200(A)
= 1,07,200 (A)
Module 3 – Marginal Costing
➢ It is a Technique
➢ Profit = Sales – Contribution
➢ Absorption Costing - Calculated by using Cost Sheet
➢ Contribution = FC + Profit
➢ Valuation of Closing Stock
Cost of Production * No. of units in Closing Stock

No. of Units
➢ Opening Stock is not given then value it at current Price.

➢ Break Even Point: Sales = Total Cost, no profit no loss
➢ Margin of Safety = Sales made in Excess of Break even Point.
➢ More MOS more Profit, MOS Can be calculated in units Rs.
➢ MOS = Actual Sales – Breakeven Sales
➢ PV = Profit Volume Ratio: to Understand the Extent of Profit in Sales.
also called as Contribution Ratio
➢ PVR = Total Contribution/ Total Sales * 100
➢ PVR = 100 -VCR
➢ Higher PVR higher Profit and Vice versa
➢ Assumptions
- Selling Price remains same
- All other and External Factors remains unchanged
- All cost is divided into FC, VC.
- Fixed Expenses remain Unchanged irrespective of no. of units of
production produced & Sold
- VC & Volume of Production
➢ Angle of Incidence: The angle between Total cost and Total Sales, wider
angle of incidence better the profit and vice versa.
Valuation of Stock Under Absorption Costing:

➢ Opening Stock value will be the closing stock value of the previous
period.
➢ If the opening Stock is not valued, it will be valued in the current cost.
Opening Stock = Cost of Production/Units Produced * Units in OS

Closing Stock = Cost of Production/Units Produced * Units in CS
1) In a period, a company produced 2,000 units of a particular commodity

and sold the same at Rs 50 per unit. The relevant cost data is as follows:
Direct Materials 25,000
Direct Labour 15,000
Direct Expenses 2,000
Production overhead
Variable 5,000
Fixed 2,000
Administration overhead
Variable 1,000
Fixed 2,500
Selling & Distribution overhead
Variable 5,000
Fixed 8,000
Assuming that there are no closing inventories, prepare statements
under Absorption Costing & Marginal Costing.
Solution:
Income Statement under Absorption Costing
DM 25,000
DL 15,000
D. Expenses 2,000
Prime Cost 42,000
Add: Factory Overheads
- Variable 5000
- Fixed 2,000 7,000
Works Cost 49,000
Add: Office & Administration O/Hs
- Variable 1,000
- Fixed 2,500 3,500
Cost of Production - 52,500
Add: Opening Stock - -
Less: Closing Stock - -
COGS - 52,500
Add: S&D overheads
- Variable 5,000
- Fixed 8,000 12,000
Cost of Sales 65,500
Profit 34,500
Sales (2,000 * 50) 1,00,000
Income Statement Marginal Costing

Sales (2,00,000 units @50 per unit) 1,00,000
(-) Variable Cost
- DM (25,000)
- DL (15,000)
- D. Expenses (2,000)
- Variable Factory Cost (5,000)
- Variable Office & (1,000)
Administration
Add: Opening Stock -
Less: Closing Stock -
(48,000)
Add: Variable S&D Overheads (5,000) (53,000)
Contribution 47,000
(-) FC
- Factory (2,000)
- Office & Administration (2,500)
- S&D (8,000) (11,500)
Profit 34,500
2) Prepare Income Statement under Absorption Costing and Marginal

Costing from information of 2015 – 2016.
Opening Stock: - 1,000 units at Rs 70,000 including variable cost of
Rs 50 per unit.
Fixed cost: - Rs 1,20,000
Variable cost: - Rs 60 per unit
Production: - 10,000 units
Sales: - 7,000 units at Rs 100 per unit.
Stock is valued on the basis of FIFO.
Solution:
Income Statement under Absorption Costing
Particulars Amount (No. Amount
of Units)
Variable Product Overheads @ Rs. 6,00,000
60
Fixed Production Overheads 1,20,000
Cost of Production 10,000 7,20,000
Add: Opening Stock 1,000 70,000
11,000 7,90,000
Less: Closing Stock (4,000) (2,88,000)
COGS 7,000 5,02,000
Add: s&d overheads - -
Total Cost - 5,02,000
Profit 1,98,000
Sales (7,000 @ 100) 7,00,000
Income Statement Under Marginal Costing

Sales (7,000 * 100) 7,00,000
(-) Variable Cost
- Variable Cost of Production 6,00,000
(10,000 *60)
Add: Opening Stock (1,000 *50) 50,000
6,50,000
Less: Closing Stock (4,000@60) 2,40,000
4,10,000
Add: Variable Cost of S&D -
Total VC 4,10,000
Contribution - 2,90,000
(-) Fixed Cost - (1,20,000)
Profit - 1,70,000
Working Note
Calculation of No. of Units in Closing Stock
= Opening Stock + Production – Units Sold
= 1,000 + 10,000 – 7,000
= 4,000.
Closing Stock = COP/No. of Units Produced * No. of Units in Closing Stock

= 7,20,000/10,000 * 4,000
= 2,88,000
Note:
In absorption we take variable and Fixed cost to value stock whereas under
marginal we take only variable cost (excluding S&D Expenses) are only
considered to value the inventory.
3) Your company has a production capacity of 12,500 units. Opening

inventory of finished goods on 1/1/2015 was 1,000 units. During the year
ending 31/12/2015, it produced 11,000 units while it sold only 10,000
units.
The variable cost per unit is Rs 6.50 and standard fixed factory cost is
Rs 16,500. Total fixed selling and administration overhead amounted to
Rs 10,000. The company sells its product at Rs 10 per unit. Prepare
income statement under absorption costing and marginal costing.
Solution:
Income Statement Under Absorption Costing:
Particulars No. of Units Amount (in Rs.)
Variable Production Cost (11,000 * 6.50) 71,500
Fixed Production Cost 16,500
Cost of Production 11,000 88,000
Add: Opening Stock 1,000 8,000
(88,000/11,000 * 1,000)
12,000 96,000
Less: Closing Stock 2,000 16,000
(88,000/11,000*2,000)
COGS 80,000
Add: S&D Expenses 10,000
Total cost 90,000
Profit 10,000
Sales (10,000 * 10) 1,00,000
Calculation of No. of units in Closing Stock

= Opening Stock Units + Units Produced – Number of Units of Sold
= 1,000 + 11,000 -10,000
= 2,000 Units.
Income Statement Under Marginal Costing:
Particulars Amount (In Rs.) Amount (in Rs.)
Sales (10,000 *10) 1,00,000
Less: Variable Cost of Production 71,500
(11,000 * 6.5)
Add: Opening Stock (1,000 * 6.5) 6,500
Less: Closing Stock (2,000 * 6.5) 13,000
Total Variable Cost (65,000)
Contribution 35,000
(-) Fixed Cost (26,500)
Profit 8,500
4) Your company has production capacity of 2,00,000 units. Normal

capacity utilised is 90% of total capacity. Standard variable cost is Rs 11
per unit. The fixed cost is Rs 3,60000 per year. Variable selling cost is Rs
3 per unit. And fixed selling cost is Rs 2,70,000. The per unit selling
price is Rs 20 in the year ended 30th June 2015. Production was 1,60,000
units and sales were 1,50,000 units. The closing inventory on 30 th June
2015 was 20,000 units. The actual variable production costs were Rs
35,000 higher than the standard variable cost.
a) Calculate profit for the year by using Absorption Costing and

Marginal costing
b) Explain the reasons for the difference in profits, if any.
Solution:
Normal Capacity Utilized = 90%
Opening Stock = Closing Stock + No. of Units Sold - No. of Units Produced
= 20,000 + 1,50,000 – 1,60,000
= 10,000
Income Statement Under Absorption Costing

Particulars Amount (Rs.) Amount (Rs.)
Variable Cost @Rs. 11 17,60,000
(1,60,000*11)
Add: Additional VC 35,000
Fixed Cost 3,60,000
Cost of Production 21,55,000
Add: Opening Stock (10,000 *13) 1,30,000
Less: Closing Stock (2,69,375)
(21,55,000/1,60,000 * 20,000)
COGS 20,15,625
Add: Selling & Distribution Expenses
- Variable (1,50,000 *3) 4,50,000
- Fixed 2,70,000 7,20,000
Total Cost/ Cost of Sales 27,35,625
Profit 2,64,375
Sales (1,50,000 * 20) 30,00,000

Sales (1,50,000 * 20) 30,00,000
Less: VC
- Variable Cost of Production 17,60,000
(1,60,000 *11)
- Additional VC 35,000
17,95,000
Add: Opening Stock (10,000 *11) 1,10,000
19,05,000
Less: Closing Stock 2,24,375
(17,95,000/1,60,000 * 20,000)
Variable Cost of Product of Unit Sold 16,80,625
Add: VC of S &D (1,50,000 * 3) 4,50,000
Total Variable Cost of Units Sold (21,30,625)
Contribution 8,69,375
(-) Fixed Cost
- Fixed Production 3,60,000
- Fixed Selling 2,70,000 (6,30,000)
Profit 2,39,375
5) Hind General Corporation produces only one product which had the
following costs
Variable manufacturing costs Rs 4 per unit

Fixed manufacturing costs Rs 2,00,000 per year
There are no work – in – progress inventories.
In 2014, the company produced 2,00,000 units and sold 90% of them
at a price of Rs 7 per unit. In 2015, the company produced 2,10,000
units and sold 2,15,000 units at the same price.
You are required to prepare income statements for 2014 and 2015
based on absorption costing and marginal costing.
Solution:

Particulars 2014(Rs.) 2015 (Rs.)
Variable Cost of Production @4 per unit 8,00,000 8,40,000
Fixed Cost 2,00,000 2,00,000
Cost of Production 10,00,000 10,40,000
Add: Opening Stock - 1,00,000
Less: Closing Stock
- 2014 (1,00,000)
(10,00,000/2,00,000 * 20,000)
- 2015 (74.285)
(10,40,000/2,10,000 * 15,000)
Cost of Goods Sold/Total Cost 9,00,000 10,65,715
Profit 3,60,000 4,39,285
Sales 12,60,000 15,05,000

Sales 12,60,000 15,05,000
Less: Variable Cost (8,00,000) (8,40,000)
4,60,000 6,65,000
Add: Opening Stock - 46,000
Less: Closing Stock (46,000) (47,500)
(4,60,000/2,00,000 *20,000) = 46,000
(6,65,000/2,10,000 * 15,000) =47,500
Contribution 4,14,000 6,63,500
(-) Fixed Cost (2,00,000) (2,00,000)
Profit 2,14,000 4,63,500
6) The following cost information relates to factory X for 2 years
Particulars 2014 2015

Installed capacity (units) 10,000 10,000
Opening stock (units) -------- 1,000
Closing stock (units) 1,000 ------
Output (units) 10,000 9,000
Selling Price per unit Rs 14 Rs 14
Fixed cost for the year Rs 85,000 Rs 85,000
Variable cost per unit Rs 2.90 Rs 2.90
Work out the profit under absorption costing and marginal costing
for 2 years. Assume FIFO basis.
Solution:

Particulars 2014 (Rs.) 2015 (Rs.)

7) From the following cost, production and sales data of X company

prepare comparative income statement for 3 years under Absorption
Costing and Direct Costing. Indicate the unit cost for each year under
each method. Also evaluate closing stock. The company produced a
single article for sale.
Particulars 2013 2014 2015
Production & Sales (all units)
Opening stock -------- ------ 10,000
Production 50,000 70,000 60,000
Sales 50,000 60,000 66,000
Closing stock ---------- 10,000 4,000
Cost incurred (Rs)
Direct material 1,00,000 1,44,000 1,27,200
Direct labour 1,50,000 2,16,000 1,74,000
Direct expenses 48,000 72,000 56,000
Factory & administration overhead (fixed) 72,000 72,000 70,000
Variable selling cost 2,50,000 3,00,000 3,40,000
Fixed selling cost 50,000 50,000 50,000
Selling Price per unit – Rs 20
Solution:
8) Using the information below prepare profit statements for the months of
June and July using (i) marginal costing (ii) full costing.
Data per unit: Rs

Selling price 50
Direct material cost 18
Direct labour cost 4
Variable production overheads 3
Monthly costs:
Fixed production overheads 99,000
Fixed selling expenses 15,000
Fixed administration expenses 25,000
Variable selling costs are 10% of sales revenue.
Month Sales (units) Production (units)
June 10,000 12,000
July 12,000 10,000

Solution:

Particulars June (Rs.) July (Rs.)
Direct Material @ Rs. 18 per unit 2,16,000 1,80,000
Direct Labor @ Rs. 4 per Unit 48,000 40,000
Variable Production Overheads @ 36,000 30,000
Rs.3
Fixed Production Overheads 99,000 99,000
Fixed Administration Expenses 25,000 25,000
Cost of Production 4,24,000 3,74,000
Less: Closing Stock 70,667 -
(4,24,000/12,000 * 2,000)
COGS 3,53,333 4,44,667
Add:
- Variable Selling Expenses 50,000 60,000
- Fixed Selling Expenses 15,000 15,000
Total Cost 4,18,333 5,19,667
Profit 81,667 80,333
Sales 5,00,000 6,00,000

Particulars June (Rs.) July (Rs.)
Sales 5,00,000 6,00,000
Less: Variable Cost
- DM @Rs. 18 2,16,000 1,80,000
- DL @ Rs. 4 48,000 40,000
- Variable Production Overheads 36,000 30,000
@3
Total Variable Cost of Production 3,00,000 2,50,000
Less: Closing Stock (3,00,000/12,000 50,000 -
* 2,000)
Total Variable Cost 2,50,000 3,00,000
Add: Variable Selling overheads 50,000 60,000
3,00,000 3,60,000
(-) Fixed Cost (1,39,000) (1,39,000)
Profit 61,000 1,01,000
9) ABC Motors assembles and sells motor vehicles. It uses an actual

costing system, in which unit cost are calculated on a monthly basis.
Data relating to March and April 2015 are:
March April
Unit data
Beginning inventory ------ 150
Production 500 400
Sales 350 520
Variable cost data
Manufacturing cost per Rs 10,000 Rs 10,000
unit produced 3,000 3,000
Distribution costs per
unit sold
Fixed cost data:
Manufacturing costs Rs Rs
Marketing costs 20,00,000 20,00,000
6,00,000 6,00,000
The selling price per motor vehicle is Rs 24,000.

Prepare income statements for ABC Motors in March and April 2015
under (a) absorption costing and (b) marginal costing.
Solution:

Particulars March (Rs.) April (Rs.)

Particulars March (Rs.) April (Rs.)
10) The following details were taken from the past records of a company at
two cost levels. The company has 3 departments and all fixed costs
have been apportioned to the departments on the basis of sales
turnover.
Level 1
Particulars Dept A Dept B Dept C Total
Sales 50,000 75,000 1,25,000 2,50,000
Less: Costs 45,000 60,000 1,06,250 2,11,250
Profit 5,000 15,000 18,750 38,750
Level 2
Particulars Dept A Dept B Dept C Total
Sales 60,000 90,000 1,50,000 3,00,000
Less: Costs 50,000 66,000 1,17,500 2,33,500
Profit 10,000 24,000 32,500 66,500
You are required to recast the above statement using marginal costing
approach showing Contribution per department and in total.
Solution:
PV Ratio = Change in Profits/Change in Sales * 100
For A = 5,000/10,000 * 100 = 50%
For B = 9,000/15,000 * 100 = 60%

For C = 13,750/25,000 * 100 = 55%
VCR = Change in Cost /Change in Sales * 100
For A = 5,000/10,000 * 100 = 50%

For B = 6,000/15,000 * 100 = 40%
For C = 11,250/25,000 * 100 = 45%.
Level 1
Particulars Dep. A Dep. B Dep. C Total

Sales 50,000 75,000 1,25,000 2,50,000
(-) V.C. 25,000 30,000 (56,250) (1,11,250)
Contribution 25,000 45,000 68,750 1,38,750
(-) Fixed Cost (20,000) (30,000) (50,000) (1,00,000)
Profit 5,000 15,000 18,750 38,750
Level 2:
Particulars Dep. A Dep. B Dep. C Total

Sales 60,000 90,000 1,50,000 3,00,000
(-) V.C (30,000) (36,000) (67,500) (1,31,500)
Contribution 30,000 54,000 82,500 1,66,500
(-) FC (20,000) (30,000) (50,000) (1,00,000)
Profit 10,000 24,000 32,500 66,500
Make/Buy
Decision to be made using Marginal Costing:

➢ Make or buy decision
➢ Accepting o rejecting foreign order
➢ Continuation or Discontinuation of a Product
➢ Profitable Product Mix
In all the above the decision is made with key factor or without key factor.
11) A manufacturing company finds that while the cost of making a

component No. 0.51 in its own workshop is Rs 8 each, the same is
available in market at Rs 6.50 with an assurance of continuous supply.
Give your suggestion whether to make or buy this component. Give also
your views in case the supplier reduces the price from Rs 6.50 to Rs
5.50.
The cost data is as follows:

Particulars Rs (per unit cost)
Materials 3.00
Direct Labour 2.00
Other Variable Expenses 1.00
Depreciation & other Fixed Expenses 2.00
Total cost 8.00
Solution:
Calculation of Cost of Making the Component
Particulars Amount
DM 3
DL 2
Other variable Expenses 1
Total Variable Cost/Cost of Making 6.00
Cost of Buying 6.50
Net Saving when Made internally 0.50
When buyer’s Cost is Rs. 6.50 per component it is better to make the
component internally as the decision will result in net savings of Rs. .50 per
component.
However, if the Supplier reduces his price to Rs. 5.50 per unit
Cost of Making = Rs. 6
Cost of Buying = Rs. 5.50
Net savings if outsourced Rs. 0.50
Hence, we advise to outsource the component if cost of outsourcing is Rs.

5.50.
12) Expansion Ltd. manufactures automobile accessories & parts. The
following are the total cost of processing 1,00,000 units
Particulars Amount (Rs)
Direct materials cost 5 lakhs
Direct labour cost 8 lakhs
Variable factory overheads 6 lakhs
Fixed factory overheads 5 lakhs
The purchase price of the component is Rs 22 per unit. The fixed
overhead
would continue to be incurred even when the component is bought from
outside although there would have been reduction to the extent of Rs
2,00,000.
a) Should the part be made or bought considering present facility
when released following a buying decision would remain idle?
b) In case the released capacity can be rented out to another
manufacturer for Rs 1,50,000 having good demand, what should
be the decision?
Solution:
a.
Particulars Amount
DM cost 5,00,000
DL Cost 8,00,000
Variable Factory Overheads 6,00,000
Total Making Cost 19,00,000
No. of Units Produced 1,00,000
Cost of Making Per Unit 19
(19,00,000/1,00,000)
Cost of Buying 22 per unit

Less: Savings in FC (2)
Effective Cost of Outsourcing 20 per unit or 20,00,000
Net Savings when Made Internally 1,00,000
(20,00,000 – 19,00,000)
As the Company will make the Net Savings of Rs. 1,00,000 by making the
component internally we suggest them to make the component internally.
b.
Cost of Making 19,00,000
Cost of Outsourcing 22,00,000
(1,00,000 *22)
Less: Savings in FC
- Fixed Cost (2,00,000)
- Rentals (1,50,000)
Effective Cost of Outsourcing 18,50,000
Net Savings if Outsourced 50,000
Thus, there is a net Saving of Rs. 50,000 by outsourcing. Hence, we suggest the
management to outsource and let out the facility for Rentals.
13) Annexe Ltd is manufacturing a part for one of its major product at a cost
of Rs 22. The cost is analysed as follows:
Cost per unit

Materials 6
Labour 8
Variable overheads 5
Fixed overheads 3
Total cost 22
The total requirement is 25,000 units p a. An outside supplier
supplies the part at Rs 20 per unit with no change in quality and
guarantee of regular supply.
a) Should the company go for buying in the place of making the
component?
b) If the foreman who is getting a salary of Rs 3,000 per month is
retiring soon and the premises can be let out at an annual rent of Rs
20,000 in case the production is stopped, what would be your
decision?
Solution:
a.
Material Cost 6
Labor 8
Variable O/H 5
Total Variable Cost/Cost of Making 19
Cost of Outsourcing 20
Net Savings when made internally Rs. 1 per unit
Total Savings (1*25,000) 25,000
As the company is making total net savings of Rs. 25,000 when making
internally. Hence, we suggest the company to make internally.
b.
Particulars Amount Per Unit
Cost of Making 4,75,000 19
Cost of Outsourcing 5,00,000 20

Less: Salary (36,000)
Let Out (20,000)
Effective Cost of Outsourcing 4,44,000
Net Savings when Outsourced 31,000
As the Company is making a Net Savings of Rs. 31,000 when outsourced.

Hence, we suggest the company to outsource and let out the premises.
14) K.K. Ltd purchased 12,000 units p.a of a spare part from another
manufacturer at Rs 4 per unit. The production manager has put forward
a proposal that the production of this component may be undertaken for
production in order to stop the purchase of the above said spare part.
He has submitted the following information along with the proposal;
a) Material and labour would cost 60 paise and 50 paise per unit
respectively.
b) Variable overheads will be 100% of labour.
c) A foreman will be paid Rs 1,000 per month.
d) The machine needed would cost Rs 50,000. It will have a
production capacity of 15,000 units p.a and its economic life will be 5
years.
e) Funds needed for the above can be obtained at an interest rate of
10% p.a.
You are required to advise the management about the proposal of the
production manager.
Solution:
Particulars Per Unit (Rs.) Amount (Rs.)
Cost of Purchasing (12,000 units 4 48,000
@Rs.4)
DM .60 7,200
DL .50 6,000
Variable Overheads .50 6,000
Cost of Making 1.60 19,200
Net Savings if made internally 2.40 28,800
Conclusion:
As there is a Net Savings of Rs. 28,800 when made internally, hence we
advise the company to make the product internally.

Cost Of making 19,200
Add: Additional Cost of Manufacturing
- Forman Salary (1,000 * 12) 12,000
- Depreciation on Machinery 10,000
(50,000/5)
- Interest on Fund Borrowed 5,000 27,000
(50,000 * 10/100)
Total Cost of Making 46,200
Cost of Outsourcing 48,000
Net Savings if made internally 1,800
Conclusion:
As there is a net savings of Rs. 1,800 if made internally, hence we suggest
the company to make it internally.
Note:
Exclusive Fixed Expenses are spent for the purpose of production therefore
they are taken under cost of Producing.
15) Auto parts Ltd has an annual production of 90,000 units
of Motor components. The cost structure is as follows:
Particulars Cost per unit
Materials 270
Labour (25% fixed) 180
Expenses – variable 90
- fixed 135
Total 675
a) The production manager has an offer from a supplier to
supply the part at Rs 540 per unit. Should the
component be purchased and production stopped?
b) Assume the resources now used for the component, are
to be used to produce another new product for which
selling price is Rs 485 per unit.
In the latter case materials cost Rs 200 per unit. 90,000
units of this product can be produced at the same cost
basis for labour and expenses.
Discuss whether it would be advisable to develop
resources to manufacture the new product, assuming
the component now manufactured will be bought from
the supplier.
Solution:
a.
Calculation of Cost of Making
(In Rs.) (In Rs.)
Materials 270
Labor 135
Variable Expenses 90
Total VC/Cost of Making 495
Cost of Buying 540
Net Savings if made Internally Rs. 45 per unit
Total Savings if made internally 40,50,000
(90,000 * 45)
From the above analysis the company is advised to make the component
internally as the decision would result in a total savings of Rs. 40,50,000.
b. Calculation of Cost of Making the New Product

(In Rs.) (In Rs.)
Material 200
Labor 135
Variable Expenses 90
Total Variable Cost/Cost of Making 425
Selling price 485

Profit per Unit from the new product 60
Total profit (90,000 * 60) 54,00,000
Less: Loss if the Component is (40,50,000)
Outsourced
Net Savings if the resources are 13,50,000
diversified for New Product and the
Component is Outsourced
Conclusion:
16) The management of Automobiles Corporation requests assistance in

arriving at a decision whether to continue manufacturing a part or to buy
it from an outside supplier who has been quoting a price of Rs 8. The
annual requirement is 5,000 units of the part. The cost details are as
follows:
Materials 17,500
Direct labour 28,000
Indirect labour 6,000
Power 300
Other variable charges 640
If the component is bought from outside, the present machinery used
to make the component could be sold and its book value would be
realised. This step would reduce depreciation on machinery by Rs
2,000 and property taxes by Rs 1,000.
If the component is bought from outside supplier the following
additional costs would be incurred.
Freight 0.50 per unit
Receiving, handling & inspection charges – Rs 5,000.
You are required to make a statement comparing the cost of
manufacturing and purchasing. What will you advise?
Solution:
Calculation of Cost of Making the Component
(In Rs.) (In Rs.)
Material 17,500
Direct Labor 28,000
Indirect Labor 6,000
Power 300
Other Variable Charges 640
Cost of Making 52,540
Cost of Outsourcing (5,000 * 8) 40,000

(+) Additional Cost
- Freight (5,000 * .50) 2,500
- Receiving, Handling and 5,000 7,500
Inspection Charges
47,500
Less: Savings in Fixed Cost
(-) Depreciation (2,000)
(-) Property Tax (1,000)
Effective Cost of Outsourcing 44,500
Net Savings fi Outsourced (52,540 – 7,940
44,500)
Therefore, the company should outsource as it is having the net saving of
Rs. 7,940 if outsourced.
17) K Ltd produces a variety of products, each having a number of

component parts. B takes 5 hours to process on a machine working to
full capacity. B has a selling price of Rs 50 and a marginal cost of Rs 30
per unit. ‘A- 10’ component part used for Product A, could be made on
the same machine in 2 hours for a marginal cost of Rs 5 per unit. The
supplier’s price is Rs 12.50. Should K Ltd make or buy ‘A – 10’? Assume
that machine hour is the limiting factor.
Solution:
Component B
Particulars Amount (Rs.)
Selling Price 50
(-) VC (30)
Contribution 20
Time Taken Per Unit 5 hrs.
Contribution Per Hour 4 Rs.
Component A10
Particulars Amount (Rs.)
Cost of making 5
Time Taken 2 hrs.
Contribution (4*2) 8
Effective Cost of Making 13
Cost of Outsourcing 12.50
Net Savings when component is .50
Outsourced
As there is a profit of Rs. .50 per unit of Component when Outsourced, hence
we advise the company to outsource the component.
18) There are two components X and Y. It is considering to manufacture one

of the components and buy the other. The relative details are:
Particulars X Y
Materials (Rs) 5,00,000 2,00,000
Labour (Rs) 3,00,000 3,50,000
Variable overheads(Rs) 2,00,000 2,50,000
Fixed overheads (Rs) 5,00,000 5,00,000
Total output (units) 10,000 20,000
Buying price per unit 170 60
Machine time per unit (units) 25 minutes 10 minutes
Materials per unit 500 grams 100 grams
Give your recommendations as to which to be bought and which to
be manufactured.
a) There is no key factor
b) Material in kgs is key factor
c) Machine hours is key factor
Solution:
a) When there is no key factor
Particulars Component X Component Y
(Rs.) (Rs.)
DM 5,00,000 2,00,000
Labor 3,00,000 3,50,000
Variable O/Hs 2,00,000 2,50,000
Total Variable Cost/Cost of Making 10,00,000 8,00,000
No. of units 10,000 20,000
Cost of Outsourcing 17,00,000 12,00,000
Net Savings when Made Internally 7,00,000 4,00,000
Therefore, X should be made internally as it is saving more, and Y should be

outsourced as only one component can be made internally.
b) When raw material is the key factor

(Rs.) (Rs.)
Net Savings if Made internally 7,00,000 4,00,000
No. of Units 10,000 20,000
Net Savings/unit 70 20
Raw material Consumption per unit 500 grams 100 grams
Net Saving per kg of Raw Material 140 200
when made internally
- Component X
(70/500 * 1000) = 140
- Component Y
(20/100 * 1000) = 200
Therefore, we should make the Component Y internally and Outsource

Component X, as Component is making more net savings when made
internally compared to component Y.
c) When Machine hour is the key factor
Statement showing calculation of Net Savings per unit of Machine Hour

(Rs.) (Rs.)
Net Savings when made internally 7,00,000 4,00,000
No. of Units 10,000 20,000
Net Savings/Unit 70 20
Machine hour Per unit 25 minutes 10 minutes
Net Savings Per Machine Hour 168 120
- Component X
(70/25 *60) = 168
- Component Y
(20/10 * 60) =120
As Component X is Saving more when made internally then Component Y ,

hence we suggest the company to make component X and Outsource
Component Y.
Accept / Reject
19) The cost sheet of a product is given as under:

Particulars Per unit (Rs)
Direct Materials 5.00
Direct Wages 3.00
Factory overheads
Fixed 0.50
Variable 0.50 1.00
Administrative expenses 0.75
Selling & Distribution overheads
Fixed 0.25
Variable 0.50 0.75
Total cost 10.50
The selling price per unit is Rs 12.

The above figures are for an output of 50,000 units; the capacity for
the firm is 65,000 units. A foreign customer is desirous of buying
15,000 units at a price of Rs 10 per unit. Advise the manufacturer
whether the order should be accepted. What will be your advise if the
order were from a local merchant?
Solution:
Particulars Domestic Overseas Total
Market Market
(50,000 units) (15,000 units)
Sales (50,000 * 12) 6,00,000 1,50,000 7,50,000
(-) Variable Cost
- DM @Rs.5 (2,50,000) (75,000) (3,25,000)
- DW @Rs. 3 (1,50,000) (45,000) (1,95,000)
- Variable Factory Overheads (25,000) (7,500) (32,500)
@Rs 0.50
- Variable S&D O/H @ Rs. 0.50 (25,000) - (25,000)
Total Variable Cost (4,50,000) (1,27,500) (5,77,500)
Contribution 1,50,000 22,500 1,72,500
(-) Fixed Cost
- Fixed Factory Overheads (25,000)
- Administrative Expenses (32,500)
- Fixed Selling Expenses (12,500)
Total Fixed Cost (75,000) (75,000)
Profit 75,000 22,500 97,500
Since the Profits are Increasing by Rs. 22,500, we advise the company to accept
the foreign order.
Note:
➢ Here we are Considering S&D Expenses as entire stock is sold for
Domestic Market.
➢ Fixed Cost will be Taken only into Domestic Market
➢ Why Foreign order should be accepted in case of no profits - To capture
other Market.
20) A manufacturer has planned his level of operation at 50% of his plant
capacity of 30,000 units (at 100% capacity). His expenses are estimated
as follows, if 50% of the plant capacity is utilised.
Direct materials – Rs 8,280
Direct wages – Rs 11,160
Variable & other manufacturing expenses – Rs 3,960
Total fixed expenses irrespective of capacity utilisation – Rs 6,000
The expected selling price in the domestic market is Rs 2 per unit.
Recently, the manufacturer has received a trade enquiry from an
overseas organisation interested in purchasing 6,000 units at a price
of Rs 1.45 per unit.
As a professional management accountant what would your
suggestion be regarding acceptance or rejection of the offer?
Support your suggestion with suitable quantitative information.
Particulars Domestic Foreign Order Aggregate

(15,000 units) (6,000 units)
Sales 30,000 8,700 38,700
(-) VC
- DM (8,280) (3,312) (11,592)
- DW (11,160) (4,464) (15,624)
- Variable & other (3,960) (1,584) (5,544)
manufacturing
Expenses
Total Variable Expenses (23,400) (9,360) (32,760)
Contribution 6,600 (660) 5,940
(-) Fixed Cost (6,000) - (6,000)
Profit / Loss 600 (660) (60)
Since the foreign Market is Contributing a Loss of Rs. 660, and the aggregate
profits are converted into losses, the proposal should be rejected.
21) A mechanical toy factory presents the following information for the
year 2015:
Particulars Rs
Material cost 1,20,000
Labour cost 2,40,000
Fixed overheads 1,20,000
Variable overheads 60,000
Units produced 15,000 units
Selling price per unit 40
The available capacity is a production of 20,000 units per year. The
firm has an offer for the purchase of 5,000 additional units at a price
of Rs 30 per unit. It is expected that by accepting this offer, there will
be a saving of Re 1 per unit in material cost on all units
manufactured; the fixed overheads will increase by Rs 20,000 and the
overall efficiency will drop by 3% on all production.
Prepare a statement showing the variation of net profits resulting
from the acceptance of the order.
Statement showing the comparative Profitability of Existing and New

Proposal.
Particulars Existing New Proposal
(15,000 units) (20,000 units)
Sales 6,00,000 7,50,000
Less: VC
- Material Cost (1,20,000) (1,40,000)
For New Proposal
(1,20,000/15,000 = Rs. 8)
(Rs.8 – Rs.1) = Rs. 7
(7*20,000) = 1,40,000
- Labor Cost (2,40,000) (3,29,897)
For New Proposal
(2,40,000/15,000 *20,000) =3,20,000
(3,20,000/97 * 100) = 3,29,897
- Variable O/Hs (60,000) (80,000)
Total Variable Cost (4,20,000) (5,49,897)
(-) Fixed Cost (1,20,000) (1,40,000)
Profit 60,000 60,103
Since the Profit is increasing by Rs. 103 from the Existing level, we propose
to accept the proposal of 5,000 additional units.
Working Note:
For Sale of New Proposal = (15,000 * 40) +(5,000 * 30)
= 7,50,000
22) A manufacturing business sells its product at Rs 20 per unit. It has a
normal capacity of 50,000 units p.a and budgeted costs at this level are:
Particulars Rs
Direct materials 3,00,000
Direct labour 2,00,000
Expenses:
Fixed 2,50,000
Variable 1,00,000
A sales budget has been prepared for the local market and orders are
expected for 35,000 units. The sales manager has established that an
export order for an additional 10,000 units could be negotiated at a
special price of Rs 14 per unit. He has also established that a second
order of 4,000 modified units could be obtained at a special price of
Rs 13 per unit. The modifications would reduce the cost of direct
materials by Re 1 per unit but would increase the direct labour cost
by 25%.
Submit your recommendations, with facts and figures, as to whether
the special orders should be accepted or not.
Solution:
Particulars Domestic order Foreign Order Foreign Order Total

(35,000 units) (10,000 units) (4,000 units)
Sales 7,00,000 1,40,000 52,000 8,92,000
(-) VC
- DM (2,10,000) (60,000) (20,000) (2,90,000)
- DL (1,40,000) (40,000) (20,000) (2,00,000)
- Variable Expenses (70,000) (20,000) (8,000) (98,000)
Total Variable Cost (4,20,000) (1,20,000) (48,000) (5,88,000)
Contribution 2,80,000 20,000 4,000 3,04,000
(-) Fixed Cost (2,50,000) - - (2,50,000)
Profit 30,000 20,000 4,000 54,000
Therefore, we should accept all the proposal as all of them are giving some
profit.
23) Ram Lal and Company manufactures a component which is ordinarily

sold to other manufacturers. The plant has been operating at 50%
capacity because of reduced demand. A foreign manufacturer offers to
buy 5,000 units at a total price of Rs 25,000. The domestic selling price
of the product is Rs 6.20 per unit. The company hesitates to accept the
order for fear of increasing its already large operating losses. Overhead
expenses of the company amount to Rs 6,000 per year. The cost
accounting records show an average cost of Rs 6 per unit for the
product during the last one year, as shown by the following figures:
Cost of production during the last one year:
Particulars Rs
Direct materials 10,000
Factory expenses 40,000
60,000
Production – 10,000 units.
The cost accountant of the company has set up the following
schedule of the estimated cost of producing 15,000 units, in case the
order from the foreigner is accepted:
Particulars Rs
Direct materials 15,000
Factory expenses 50,000
80,000
Should the company accept the offer? Justify your answer with
appropriate calculations.
Statement Showing the Comparative Profitability of Domestic & Foreign

Order
Particulars Domestic Foreign
(10,000 units) (15,000 units)
Sales 62,000 87,000
(-) Variable Cost
- DM (10,000) (15,000)
- DL (10,000) (15,000)
- Factory Expenses (40,000) (50,000)
Total Variable Cost (60,000) (80,000)
Contribution 2,000 7,000
(-) Fixed Cost
- Overhead Expenses (6,000) (6,000)
Profit (4,000) 1,000
Therefore, we should accept the order as it is making profit of Rs. 5,000.
24) Sports Specialists Ltd; are famous for specialised manufacture of

quality chess board sets. Presently, the company is working below its
normal capacity of 1,000 units per month. The company sells chess
boards sets in the national market at Rs 150 per unit. During April 2015;
600 units were sold which is regular sales volume for each month all
through the year.
The unit cost of production is:
Direct material Rs 60
Direct labour Rs 30
Factory overhead Rs 30
Selling and administration Rs 15
overhead
The company has received an export order on 20 th April, 2015 for the
supply of 600 units to be dispatched by 30th June, 2015. However the
offer stipulates the price per unit as Rs 100. The cost analysis
indicated that the cost of direct material and labour that are to be
incurred on the export order would be the same per unit as the
regular one of production. An amount of Rs 2,000 will have to be
incurred on special packing, labelling etc. No additional factory,
selling and administration overhead costs would be incurred in
executing the export order since the firm is operating below normal
capacity.
Should the export offer be accepted?
Solution:
Statement Showing Comparative Profitability of Domestic & Overseas
order.
Particulars Domestic Overseas Order Total
(1,200 units) (600 units)
Sales 1,80,000 60,000 2,40,000
(-) Variable Cost
- DM @Rs. 60 (72,000) (36,000) (1,08,000)
- DL @ Rs. 30 (36,000) (18,000) (54,000)
Total Variable Cost (1,08,000) (54,000) (1,62,000)
Contribution 72,000 6,000 78,000
(-) Fixed Cost
- Factory Overheads (36,000)
(600*30*2)
- S& Administrative O/H (18,000)
(600*15*2)
- Special Packing Expenses (2,000)
Total Fixed Cost (54,000) (2,000) (56,000)
Profit/loss 18,000 4,000 22,000
Hence, we Advise the company to accept overseas order as it is increasing the

profit by Rs. 4,000.
Extra Question:
A company manufactures 10,000 units of a product at the cost of Rs. 4 per
unit and there is a domestic market for consuming the entire volume of
Production at a Selling Price of Rs. 4.25 per unit. In the year 2022 there is a
fall in the demand for domestic market which can consume 10,000 units. @
SP of Rs. 3.72 per unit. The Analysis of the cost for 10,000 units is
Materials 15,000
Wages 11,000
Fixed Overheads 8,000
Variable Overheads 6,000
The foreign market is explored and it is found that this market can consume
20,000 units of the product if offered at a selling price of Rs. 3.55 per unit.
However, the Fixed Cost will Increase by Rs. 1600 if additional units are
produced. Is it worthwhile capturing the Foreign Market?
Solution:
Particulars Domestic Domestic Overseas Total
(10,000 units (10,000 (20,000 units)
@ Rs.4.25) units @ Rs.
3.72)
Sales 42,500 37,200 71,000 1,08,200
(-) Variable Cost
- DM (15,000) (15,000) (30,000) (45,000)
- DL (11,000) (11,000) (22,000) (33,000)
- Variable O/Hs (6,000) (6,000) (12,000) (18,000)
Total Variable Cost (32,000) (32,000) (64,000) (96,000)
Contribution 10,500 5,200 7,000 12,200
(-) Fixed Cost
- Fixed Overheads (8,000) (8,000) - (8,000)
- Fixed cost on Foreign Order (1,600) (1,600)
Profit 2,500 (2,800) 5,400 2,600
Therefore, we should accept the foreign order as it is giving us profit of Rs.

5,400.
Continue or Discontinue a Product
26. The marginal cost of a product is Rs 11 per unit & fixed expenses
amount to Rs 2,00,000. Selling price per unit is Rs12 and 1,00,000 units
can be sold at this price. Should the firm continue or discontinue the
production?
Solution:
Statement showing profitability of Product when it is Continued or
Discontinued
Particulars Continued Discontinued
SP 12,00,000 -
(-) VC (11,00,000) -
Contribution 1,00,000 -
(-) FC 2,00,000 2,00,000
Loss (1,00,000) (2,00,000)
Since we are making a loss of Rs. 2,00,000 in case of discontinuation it will be

better to continue the product as it is saving us Rs. 1,00,000.
27) The management of a company considers that product Y; one of the

three products of the company is not profitable as the other two with the
result no other particular efforts are made to push sales. The selling
price and costs of the three products are as follows:
Labour Department
Product Selling Direct A (Rs) B (Rs) C (Rs)
Price materials
X 68 10 8 2 2
Y 58 6 2 8 2
Z 64 8 2 2 8
Overhead rates for each Dept per Re of direct labour are as follows:
A B C
Variable overheads 1.20 0.40 1.00
Fixed overheads 1.20 2.00 1.40
What advice would you give to the management about the
profitability of product Y?
Solution:
Calculation of Variable O/Hs
Department O/H Product X Product Y Product Z
Recovery
Rate
D.L. (Rs.) Variable O/H D.L. (Rs.) V.O/H D.L.(Rs.) V. O/H
A 1.20 8 9.60 2 2.40 2 2.40
B 0.40 2 0.80 8 3.20 2 0.80
C 1.00 2 2 2 2.00 8 8.00
12.40 7.60 11.20
Calculation of Fixed O/Hs

Department O/H Product X Product Y Product Z
Recovery
Rate
D.L. (Rs.) Fixed O/H D.L. (Rs.) F.O/H D.L.(Rs.) F. O/H
A 1.20 8 9.6 2 2.4 2 2.4
B 2.00 2 4 8 16 2 4
C 1.40 2 2.80 2 2.80 8 11.20
16.4 21.2 17.6
Statement Showing the Comparative Profitability of Product X, Y, Z

Particulars X Y Z
SP 68 58 64
(-) VC
- DM (10) (6) (6)
- DL (12) (12) (12)
- V. O/Hs (12.40) (7.60) (11.20)
Total V.C. 34.40 25.60 31.20
Contribution 33.60 32.40 32.80
(-) Fixed Cost (16.40) (21.20) (17.60)
Profit 17.20 11.20 15.20
PVR = C/SP * 100 49.41% 55.86 % 51.25 %
Profit to Sales (P/SP * 100) 25.29% 19.31% 23.75%
Conclusion:
Since Product Y is increasing the PVR to 55.86% and also increasing the
companies profit by 19.31% we should continue the product.
28) Happiest Enterprises Ltd produces 3 lines of products namely A, B and

C. the details are as follows:
Particulars A B C
Capacity engaged 20% 40% 40%
Units produced 2,000 5,000 6,000
Cost per unit
Materials 20 32 36
Wages 10 12 16
Variable overheads 7 9 11
Fixed overheads 6 9 10
Total cost 43 62 73
Selling price 40 75 85
Profit (Loss) - 3 13 12
The management has already proposed to discontinue Line A and
utilise the unutilised capacity of A equally in Lines B and C. The
expected rise in cost are as follows:
B C
Materials increase by 10% 10%
Wages increase by 5% 5%
Selling price increase by 2% 5%
Fixed overhead remains unchanged. You are required to prepare a
statement of projected profit and advise the management whether
the revised mix could be adopted or not.
Solution:
Statement Showing Present Profitability of Statement A, B and C
Particulars A B C
Selling Price 40 75 85
(-) Variable Cost
- Material (20) (32) (36)
- Wages (10) (12) (16)
- Variable O/H (7) (9) (11)
Total V.C. (37) (53) (63)
Contribution Per Unit 3 22 22
Aggregate Contribution 6,000 1,10,000 1,32,000
(-) FC (12,000) (45,000) (60,000)
Profit (6,000) 65,000 72,000
Total Profit = 1,31,000
In the event of Discontinuation of Product A. The changes in units and few

expenses can be worked out as follows
A’s 20% = B 10%+40% = 50% and C – 10% +40% = 50%.
No. of Units of B = 5,000/40 * 50 = 6,250 units.
No. of Units of C = 6,000/40 * 50 = 7,500 units.
Statement showing profitability of B &C
Particulars B C Total
Selling Price 76.5 89.25
(-) Variable Cost
- DM (35.2) (39.6)
- Wages (12.6) (16.8)
- Variable Overheads (9) (11)
Total Variable cost (56.8) (67.4)
Contribution 19.7 21.85
Aggregate Contribution 1,23,125 1,63,875 2,87,000
(-) FC (1,17,000)
Profit 1,70,000
Therefore, the management should discontinue Line A and utilise the unutilised
capacity of an equally in Lines B and C, and should only produce B and C as it is
giving more Profits.
29. A wholesale company which sells 4 products; finds some of them

unprofitable and is considering elimination of one of them. The
following information is available:
A B C D
Sales 30,000 50,000 25,000 45,000
Cost of production 20,000 45,000 21,000 22,500
Area of storage (sq 5,000 4,000 8,000 3,000
mts)
No of parcels sent 10,000 15,000 7,500 17,500
No of invoices sent 8,000 14,000 6,000 12,000
Its overheads cost on the basis of allocation are as follows:
Fixed cost – Rent – Rs 3,000; basis – Sq mts
Insurance – Rs 100; basis – Sq mts
Depreciation – Rs 1,000; basis – No of parcels
Salesmen’s salaries & expenses – Rs 6,000; basis – sales
volume
Administration expenses – Rs 5,000; basis – no of invoices
Variable cost – Packing materials – 0.25 per parcel
Commission – 4% of sales
Clerical expenses – 0.05 per invoice
You are required to
a) Prepare an income statement showing profit or loss for each
product.
b) Compare the profits if the company wants to (i) eliminate product B
and (ii) if product C is eliminated.
Solution:
Statement Showing Calculation of Variable Cost of Product A, B, C and D
Particulars A B C D
Packing Material @Rs. 0.25 Per 2,500 3,750 1,875 4,375
Parcel
Commission @ 4% of Sales 1,200 2,000 1,000 1,800
Clerical Expenses @Rs. 400 300 700 600
0.05/Invoice
Total Variable Expenses 4,100 6,450 3,175 6,775
Statement Showing Calculation of Fixed Cost for All Products

Particulars A B C D
Rentals (Sq meters) 750 600 1200 450
Insurance (Sq Meters) 25 20 40 15
Depreciation (Parcel) 200 300 150 350
Salesman Salaries and 1,200 2,000 1,000 1,800
Expenses (Sales Volume)
Administrative Expenses (No. 1,000 1,750 750 1,500
of Invoices)
Total Fixed Cost 3,175 4,670 3,140 4,115
Statement Showing Profitability for all the Products

Particulars A B C D
Sales 30,000 50,000 25,000 45,000
Less: VC
- COP (20,000) (45,000) (21,000) (22,500)
- Variable O/Hs (4,100) (6,450) (3,175) (6,775)
Total Variable Cost 24,100 51,450 24,175 29,275
Contribution 5,900 (1,450) 825 15,725
(-) Fixed Cost (3,175) (4,670) (3,140) (4,115)
Profit/Loss 2,725 (6,120) (2,315) 11,610
Total profit = 5,900

Statement Showing Profitability when Product B is Eliminated
Particulars A C D Total
Contribution 5900 825 15,725 22,450
(-) Fixed Cost - - - (15,100)
Profit 7,350
Statement Showing Profitability when Product C is Eliminated

Particulars A B D Total
Contribution 5,900 (1,450) 15,725 20,175
(-) Total FC - - - (15,100)
Profit 5,075
Therefore, we will eliminate the Product B, as by eliminating B we are making

the highest Profit.
30.
The management of a factory is considering the question of an unprofitable
line namely Z. The following data are available:
X Y Z
Sales 10,00,000 8,00,000 2,00,000
Direct materials 2,95,000 3,36,000 75,000
Direct labour 1,18,000 1,12,000 45,000
Variable expenses 1,77,000 1,12,000 30,000
Fixed expenses 3,30,000 1,80,000 90,000
Profit / Loss 80,000 60,000 40,000
In the event of discontinuance of product Z certain supervisory staff
could be discharged and their expenses like salary, benefits, etc could
be reduced to the extent of Rs 20,000 which are included in fixed
expenses. The management however proposes to drop Z but retain
supervisory staff and increase product X by 2,00,000 units at Re 1 each
as selling price. Give your advice.
Solution:
Statement Showing Calculation of Profitability of all the Products
Particulars X Y Z
Sales 10,00,000 8,00,000 2,00,000
(-) V.C.
- DM (2,95,000) (3,36,000) (75,000)
- Dl (1,18,000) (1,12,000) (45,000)
- Variable Expenses (1,77,000) (1,12,000) (30,000)
Total Variable Cost (5,90,000) (5,60,000) (1,50,000)
Contribution 4,10,000 2,40,000 50,000
(-) Fixed Cost (3,30,000) (1,80,000) (90,000)
Profit/Loss 80,000 60,000 (40,000)
If Product Z is Discontinued
Sale of Product X will be increased = 10,00,000+2,00,000

= 12,00,000
Statement Showing Calculation of Profit when Product Z is Discontinued

and workers are discharged
Particulars X Y
Sales 10,00,000 8,00,000
(-) V.C.
- DM (2,95,000) (3,36,000)
- DL (1,18,000) (1,12,000)
- Variable Expenses (1,77,000) (1,12,000)
Total V.C. (5,90,000) (5,60,000)
Total Contribution = 6,50,000

(-) Fixed Expenses = (5,80,000)
Profit = 70,000
Statement Showing Calculation of Profits when Product Z is discontinued
but Supervisors are Retained
Particulars X Y Total
Sales 12,00,000 8,00,000 20,00,000
(-) Total V.C. (7,08,000) (5,60,000) (12,68,000)
Contribution 7,32,000
(-) Total FC (6,00,000)
Total Profit 1,32,000
Therefore, we should discontinue Product Z and Retain the workers.
31. The following are the present cost and output data of a manufacturer:
Product Selling price Variable cost Percentage of
per unit per unit sales
Tables 120 80 40
Chairs 60 40 35
Book cases 80 60 25
Total fixed cost – Rs 40,000. Last year’s sales was Rs 2,00,000. The
manufacturer is considering to drop the line of book cases and
replace with cabinets. His estimates for new scheme are as follows:
Product Selling price Variable cost Percentage of
per unit per unit sales
Tables 120 80 40
Chairs 60 40 40
Cabinets 150 100 20
Total fixed cost – Rs 40,000. Sales was Rs 2,50,000. Is the change
worth undertaking?
Solution:
32.
The cost per unit of the three products A, B, C of a concern is as follows:
A (Rs) B (Rs) C (Rs)

Direct Materials 10 8 9
Direct Labour 6 7 6
Variable Expenses 4 5 3
Fixed expenses 3 3 2
Total Cost 23 23 20
Profit 9 7 6
Selling Price 32 30 26
Number of units 10,000 5,000 8,000
produced
Production arrangements are such that if one product is given up,
the production of others can be raised by 50%. The directors propose
that C should be given up because the contribution in that case is the
lowest. Do you agree?
Solution:
Statement Showing Present Profitability of Three Products
Particulars A B C
(-) Variable Cost
- DM (10) (8) (9)
- DL (6) (7) (6)
- Variable (4) (5) (3)
Expenses
Total Variable (20) (20) (18)
Cost
Contribution Per 12 10 8
Unit
Aggregate 1,20,000 50,000 64,000
Contribution
(-) Fixed (30,000) (15,000) (16,000)
Expenses
Profit 90,000 35,000 48,000

No. of Units to produce when any product is dropped
A = 10,000 + 5,000 = 15,000
B = 5,000 + 2,500 = 7,500
C = 8,000 + 4,000 = 12,000
When Product A is Dropped

Particulars B C Total
Contribution
- B (7,500 * 10) 75,000
- C (1200*8) 96,000 1,71,000
(-) Fixed Cost (61,000)
When Product B is Dropped

Particulars A C Total
Contribution
- A (15,000 * 12) 1,80,000
- B (7,500 * 10) 96,000 2,76,000
Less: Fixed Cost (61,000)
When Product C Is Dropped

Particulars A B Total
- A (1,50,000 * 12) 1,80,000
- B (7,500 * 10) 75,000 2,65,000
Less: Fixed Cost (61,000)
Therefore, we should drop B, as dropping B is giving us a maximum Profit of

Rs. 2,15,000.
33.
A Ltd manufactures three products and cost particulars for the year as
follows:
X Y Z
Sales 2,00,000 4,00,000 2,50,000
Materials 1,00,000 1,50,000 1,25,000
Labour 30,000 50,000 40,000
Variable overheads 10,000 20,000 25,000
Fixed overheads 35,000 50,000 25,000
The company imports one of the raw materials which is used in the
manufacture of all the products. The consumption of materials as
follows:
X – 2,000 kgs; Y – 5,000 kgs; Z – 3,000 kgs.
There is restriction on import of raw material. The management is planning
to close down one product and utilise the raw material in the other two
products. Advise the management about the mix
Solution:
Particulars X Y Z Total
Sales 2,00,000 4,00,000 2,50,000
(-) VC
- Material (1,00,000) (1,50,000) (1,25,000)
- Labor (30,000) (50,000) (40,000)
- Variable O/Hs (10,000) (20,000) (25,000)
Total V.C. (1,40,000) (2,20,000) (1,90,000)
Contribution 60,000 1,80,000 60,000 3,00,000
(-) Fixed O/Hs (35,000) (50,000) (25,000) (1,10,000)
Profit 25,000 1,30,000 35,000 1,90,000
Contribution Per/Kg of 30 36 20
Raw Materials
Ranking II I III
Alternative Method of Production
34. Product ‘A’ can be manufactured either by machine X or machine Y.

Machine X produces 50 units of ‘A’ per hour and Machine Y produces
100 units per hour. Total machine hours available are 2000 hours per
annum. Taking into account the following cost data, determine the
profitable method of manufacture:
Per Unit of Product ‘A’

Particulars Machine X (Rs) Machine Y (Rs)
Direct material 8 10
Direct wages 12 12
Variable overheads 4 4
Fixed overheads 5 5
29 31
Selling Price 30 30
Solution:
Statement showing the Profitability of Product in two machine X and Y.
Particulars X (Rs.) Y (Rs.)
Selling Price 30 30
Less: Variable Cost
- DM (8) (10)
- DW (12) (12)
- Variable O/Hs (4) (4)
Total Variable O/Hs (24) (26)
Contribution Per unit 6 4
Production/hr. 50 100
Contribution Per Hour 300 400
No. of Hours Per Annum 2,000 2,000
Contribution P.A. 6,00,000 8,00,000
PROFITABILITY OF PRODUCTS
35. In a factory producing two different kinds of articles, the limiting factor
is the availability of labour. From the following information, show which
product is more profitable:
Product A Cost per unit Product B Cost per unit

Materials 5.00 5.00
Labour
6 hours @ Re 0.50 3.00
3 hours @ Re 0.50 1.50
Overheads:
Fixed (50% of labour) 1.50 0.75
Variable 1.50 1.50
Total Cost 11.00 8.75
Profit 3.00 2.25
Total Production for the
month (units) 500 600
Maximum capacity per month is 4,800 hours.
Solution:
Product A Product B
Selling Price 14 11
Less: VC
- DM (5) (5)
- DL (3) (1.50)
- V O/Hs (1.50) (1.50)
Total Variable cost (9.50) (8)
Contribution Per Unit 4.50 3.00
Labor Hour/ Unit 6 hrs. 3 hrs.
Contribution Per Labor .75 1
Therefore, product is more profitable.

Product A Product B
Fixed Cost 750 450
Total Labor Hour Per Month 4,800 4,800
Labor Hours Per Unit 6 3
No. of Units that can be Produced 800 1600
Contribution Per Unit 4.50 3.00
Total Contribution 3,600 4,800
(-) Fixed Cost (1,200) (1,200)
Profit 2,400 3,600
36. H.W.
A company manufactures and markets 3 products X, Y and Z. All the 3
products are made from the same set of machines. Production is limited by
machine capacity. From the data given below; indicate priorities for
products X, Y and Z with a view to maximising profits.
Particulars X Y Z
Raw material cost per unit 11.25 16.25 21.25
Direct labour cost per unit 2.50 2.50 2.50
Other variable cost per 1.50 2.25 3.55
unit
Selling Price per unit 25 30 35
Standard machine time
required per unit in 39 20 28
minutes
37) The following particulars are extracted from the records of a company
Per Unit
Particulars A B
Selling price 100 110
Consumption of materials (kg) 5 4
Material cost 24 14
Direct wages 2 3
Machine hours used 2 3
Variable overheads 4 6
Comment on the profitability of each product (both use the same raw
material) when:
a) Total sales potential in units is limited
b) Total sales potential in value is limited
c) Raw material is in short supply
d) Production capacity (in terms of machine hours) is the limiting

factor
Solution:
Statement showing the Profitability of Product A and B
A B
Selling Price 100 110
Less: Variable Cost (24) (14)
Direct Wages (2) (3)
Variable Overhead (4) (6)
Total Variable Count (30) (23)
Contribution 70 87
(a) When units are II I

limiting factor
b) When Sales value Is the limiting factor
A B
Contribution 70 87
Contribution/Per Rupee 70/100 = 0.70 87/110 = 0.79
of Sales
Ranking II I
c) When Raw Material is the limiting factor
A B
Contribution 70 87
Contribution of Raw 5 4
Materials (Kgs)
Contribution/kg of Raw 14 21.75
Material
Ranking II I
d) When Machine Hour is Limiting factor
A B
Contribution 70 87
Machine Hour/Unit 2 3
Contribution/Machine 35 29
Hour
Ranking I II
Appropriate Sales Mix
38) Present the following information to the management to choose the

appropriate sales mix.
(i) The marginal product cost & the contribution per unit.
(ii) The total contribution & profits resulting from each of the
following mixtures.
(iii)The proposed sales mixes to earn a profit of Rs 250 and Rs 300
with total sales of A and B being 300 units
Particulars Product A Product B
Direct materials (per unit) 10 9
Direct wages (per unit) 3 2
Sales price (per unit) 20 15
Fixed expenses – Rs 800.
Variable expenses are allotted to the products as 100% of direct
wages.
Sales mixtures:
a) 100 units of product A and 200 of B
b) 150 units of product A and 150 of B
c) 200 units of product A and 100 of B.
Recommend which of the sales mixtures should be adopted.
Solution:
39) H.W.
Following information has been made available from the cost records of
United Automobile Ltd manufacturing spare parts
Materials – Product X: Rs 8 per unit
Product Y: Rs 6 per unit
Direct wages – X: 24 hours per unit at Rs 0.25 per hour
Y: 16 hours per unit at Rs 0.25 per hour
Fixed overheads – Rs 750
Variable overheads – 150% of wages
Selling Price per unit – Product X: Rs 25
Product Y: Rs 20
The directors want to adopt only one of the following sales mixes for
the forthcoming period.
a) 250 units of X and 250 units of Y
b) 400 units of Y only
c) 400 units of X and 100 units of Y
d) 150 units of X and 350 units of Y
State which mix would you recommend for production
40) Parrys Confectioneries Ltd produces 3 products all of which require

sugar. The monthly average sales, cost of sales and sugar consumption
are as follows:
Sales (Rs) 10,000 12,000 8,000 30,000
Cost of sales (Rs) 6,000 8,000 5,600 19,600
Sugar requirement 500 kgs 800 kgs 240 kgs 1540
kgs
Due to government restriction sugar quota has been reduced to 1,405
kgs for a period. Suggest a suitable sales mix which would ensure
maximum profit.
Solution:
Sales 10,000 12,000 8,000 30,000
(-) Cost of Sales (6,000) (8,000) (5,600) (19,600)
Profit 4,000 4,000 2,400 10,400
Sugar Consumption 500 kgs 800 kgs. 240 kgs
Profit/kg of Sugar 8 5 10
Ranking II III I
Sugar Quota after Restriction = 1405kgs

For Z = 240 kgs
For X = 500 kgs
For Y = 1,405 – 240 – 500 = 665 kgs
Sales of Y = 12,000/800 * 665 = 9,975

(-) Cost of Sales = (6,650)
Profit = 3,325
Profitable Product Mix
41) A manufacturer was producing three products in the mix of 15,000 units
of Product A; 10,000 units of Product B and C each. The total variable
cost amounted to Rs 2,10,000 and on experience the cost ratio among
the products was estimated to be 1: 1.2: 1.5 respectively in relation to
products. The fixed cost was Rs 70,000. At the selling price of Rs 6 for
A, Rs 8 for B and Rs 10 for C he incurs loss.
In order to correct the situation, the manufacturer desired to change the

mix as follows:
I II III
A 15,000 10,000 4,000
B 12,000 15,000 16,000
C 8,000 10,000 15,000
He seeks for advice as to which mix would give him highest return.
Solution:
Statement showing the calculation of Equivalents units
Product Units Proportion Equivalents Units
A 15,000 1 15,000
B 10,000 1.2 12,000
C 10,000 1.5 15,000
42,000
Vc/Unit = 2,10,000/42,000
= 5/-
V.C. – (A)
5*1 = Rs. 5
5*1.2 = Rs. 6
5 * 1.5 = Rs. 7.50
Particulars A B C Total
SP 6 8 10
(-) VC (5) (6) (7.50)
Contribution Per 1 2 2.50
unit
Units 15,000 10,000 10,000
Contribution 15,000 20,000 25,000
Total - - - 60,000
Contribution
(-) Fixed Cost - - - 70,000
Profit/Loss (10,000)
Profitability of Mix 1
Particulars Units Contribution P/U Contribution
A 15,000 1 15,000
B 12,000 2 24,000
C 8,000 25 20,000
Total 59,000
Contribution
(-) Fixed Cost 70,000
Loss (11,000)

A 10,000 1 10,000
B 15,000 2 30,000
C 10,000 2.5 25,000
Total 65,000
Contribution
Loss (5,000)
A 4,000 1 4,000
B 16,000 2 32,000
C 15,000 2.5 37,500
Total 73,500
contribution
Profit 3,500
42) X Ltd manufactures three products A, B & C from common facilities.

Production was standardised for some months at a mix of 27000 units of
Product A and 18,000 units of Product B and C each. The total fixed cost
amounted to Rs 3,15,000. At the production volume per month the
variable cost is of the order of Rs 9,00,000. The cost ratio among the
products was estimated (excluding fixed cost) 2: 3: 4 for A, B and C
respectively. The selling price of Rs 12 for A, Rs 15 for B and Rs 30 for
C.
Three proposals as given below have been put up.

A B C
Mix 1 32,000 22,000 13,000
Mix 2 27,000 10,000 23,000
Mix 3 25,000 5,000 30,000
Which mix is the best?
Solution:
43) Jupiter Ltd has manufactured and sold 3 products during the year 2015
as under:
Product X – 20,000 units

Product Y – 14,000 units
Product Z – 10,000 units
Cost analysis has disclosed as under:
Particulars X (Rs) Y (Rs) Z (Rs)
Material cost 10 18 16
List price 20 30 40
Time taken per unit 2.5 hours 3 hours 2.5 hours
Fixed cost – Rs 2,00,000
Discount – 10%
Due to shortage of labour the available working hours for the
forthcoming year are expected to be only 90,000 hours.
Suggest a suitable production mix for the forthcoming year:
a) When there is enough demand for all products
When potential demand for X – 18,000 units; Y – 10,000 units and Z – 12,000
units.
Solution:
a)
Statement showing
Particulars X Y Z
List Price 20 30 40
(-) Trade Discount (2) (3) (4)
Net SP 18 27 36
(-) Marginal Cost (10) (18) (16)
Contribution Per 8 9 20
Unit
Labor Hour per 2.5 3 2.5
unit
Contribution Per 3.2 3 8
Labor Hour
Ranking II III I
The most profitable product from the above analysis is product Z , and hence
we suggest to manufacture and sell Product Z.
b)
Labor Hour = 90,000
Units of Z that can be Produced = 90,000/2.5
= 36,000 units.
Contribution = 36,000 @Rs. 20 = 7,20,000
(-) Fixed Cost = (2,00,000)
Profit = 5,20,000
90,000 Labor Hours

For Z = 12,000 * 2,5 = 30,000 labor Hours.
For X = 18,000 * 2,5 = 45,000 labor Hours
For Y = 90,000 – 30,000 – 45,000 = 15,000 labors Hours.
No. of Units of Y = 15,000/3 = 5,000 units.
The Suitable Product Mix is X = 18,000 units., Y = 5,000 units, Z = 12,000

units.
Contribution Per Unit 8 9 20
Units 18,000 5,000 12,000
Contribution 1,44,000 45,000 2,40,000 4,29,000
(-) FC (2,00,000)
Profit 2,29,000
44)
Bivin Udyog Ltd is engaged in 3 lines and has the following data for 2015 –
2016
Line A Line B Line C
Selling price per unit (Rs) 100 75 50
P/V Ratio (%) 10 20 40
Maximum sales potentials (units) 40,000 25,000 10,000
Raw materials as % of variable 50 50 50
cost
Fixed expenses are estimated at Rs 6,80,000.
The company uses a single raw material in all the three lines. Raw
material is in short supply and the company has a quota for raw
material of the value of Rs 18,00,000 for the year 2015 – 2016 to
manufacture the three lines of products.
You are required to:
a) Fix a product mix which gives maximum profit.
b) Calculate the amount of maximum profit.
Solution:
45)
A Ltd produces 2 products A and B and the following details are available
for a period.
A B
Less: Marginal Costs
Direct Materials 3.00 2.00
Direct Labour 1 hour ½ hour
Standard labour hour rate 2.00 2.00
Variable overheads 0.50 0.50
Fixed overheads budgeted Rs 50,000. Total direct labour hours
available is 1,00,000 hours.
The company do not want to produce Product A below 30,000 units
and Product B below 1,00,000 units. Assuming the materials and
labour are freely transferable within the products. Suggest a
profitable mix.
46)
Novelties Ltd seeks your advice on production mix of 3 products namely
Super, Bright and Fine. The following information is supplied:
Particulars Super Bright Fine

Direct materials 320 240 160
Variable overheads 16 40 24
Direct labour
Dept A at Rs 8 per hour 6 hours 10 hours 5 hours
Dept B at Rs 16 per hour 6 hours 15 hours 11 hours
From current budget you have future details as following:

Actual Production in units 5,000 6,000 10,000
Selling price per unit 624 800 480
Fixed overheads – Rs 16,00,000
Sales department’s estimate of maximum sales
Super – 6,000 units; Bright – 8,000 units; Fine – 12,000 units
You are also to note there is a constraint on supply of labour in Dept
A and its manpower can’t be increased beyond the present level.
Suggest the best production mix and also calculate the profits from
the suggested mix.
Module 5 – Ratio Analysis
05/05/2022
Extra Questions taken from Previous years Question Papers
1) Compare the Profitability of the two firms using Ratios
Particulars A ltd B ltd

Sales 25,00,000 30,00,000
Less: Cost
- Material 4,00,000 2,00,000
- Labour 2,00,000 7,00,000
- Overheads
- Fixed 9,00,000 2,00,000
- Variable 2,00,000 9,00,000
Total Cost 17,00,000 20,00,000
Profit before Interest 8,00,000 10,00,000
Less: Interest 2,00,000 4,00,000
Profit Before Taxes 6,00,000 6,00,000
Less: Taxes 2,40,000 2,40,000
Profit after Taxes 3,60,000 3,60,000
Less: Dividend Paid 2,00,000 2,00,000
Retained Earnings 1,60,000 1,60,000
Solution:
➢ Gross Profit Ratio = Gross Profit/Net Sales * 100
Gross Profit = Sales – Material – Labour
For A
Gross Profit = 25,00,000 – 4,00,000 – 2,00,000 = 19,00,000
Gross Profit Ratio = 19,00,000/25,00,000 * 100 = 76%
For B
Gross Profit = 30,00,000 – 2,00,000 – 7,00,000 = 21,00,000
Gross Profit Ratio = 21,00,000/30,00,000 * 100 = 70%
Note:
Overheads will always be taken under operating Expenses
➢ Cogs Ratio = 100 – Gross Profit ratio
For A = 100 – 76 = 24%
For B = 100 – 70 = 30%
Note:
Gross Profit Ratio and COGS ratio are Complimentary to each other.
➢ Operating Expenses Ratio = Total Operating Expenses/Net Sales * 100
Total Operating Expenses = Overheads in the question both fixed and variable.
For A = 11,00,000/25,00,000 * 100 = 44%

For B = 11,00,000/30,00,000 * 100 = 36.67%
Operating Profit Ratio = OPBIT or EBIT / Net Sales * 100

For A = 8,00,000/25,00,000 *100 = 32%
For B = 10,00,000/30,00,000 * 100 = 33.33%.
➢ Net Profits Ratio = PAT/NS * 100

For A = 3,60,0000/25,00,000 * 100
= 14.14%
For B = 3,60,000/30,00,000 * 100 = 12%
➢ Operating Ratio = Operating Cost/Net Sales * 100
Were Operating Cost = Operating Expense + COGS

For A = 17,00,000/25,00,0000 * 100 = 68%
For B = 20,00,000/30,00,000 * 100 = 66.67%
➢ Interest Coverage Ratio = EBIT/Interest
For A = 8,00,000/2,00,000 = 4 Times.

For B = 10,00,000/4,00,000 * 100 = 2.5 times.
Note:
➢ Operating Profit Ratio and Operating Ratio are Complementary to each other.
➢ Pay-out Ratio and Retained Earnings Ratio are Complementary to each other.
Comments: Written on Own

➢ The Gross Profit Ratio of Firm A is better than Firm B which shows that
company A has shown better gross Profits as Compared by Company B by
6%.
➢ The COGS ratio is Lesser in Firm A by 6% which shows that the firm A has
Curtailed its Profit in a better way.
➢ The Operating Expense Ratio of Company B is better as they have curtailed

the operating Expenses in a better Way.
➢ The Operating Profit Ratio is more in case Firm B as Compared to Firm A by

1.33%. Which Shows that Company B has better Operating Profits as
Compared to Company A.
➢ The Interest Coverage Ratio is Better in Case of Firm A as Compared to Firm

B. Interest Coverage Ratio depicts how many times company can cover its
interest from its Earnings. Higher the better.
Short Term Solvency Ratios:
➢ Absolute Liquid Ratios = Absolute Liquid Assets/Current Liabilities
Were, Absolute Liquid Assets = Cash & Cash Equivalents (Cash in Hand , Cash at
Bank , Marketable Securities)
Thumb Rule = 0.5:1
➢ Quick Ratio/Liquid Ratio/Acid Test Ratio
Quick Ratio = Quick Assets/Current Liabilities
Where Quick Assets = Current Assets – (Inventory + Prepaid Expenses)
Thumb Rule 1:1
Current Ratio/Working Capital Ratio = Current Assets/Current Liabilities

Thumb Rule = 2:1
Long Term Financial Ratios:

Debt Equity Ratio = Total LT Debt /SHFS
➢ Trading on Equity is Using other Fund to give return to the shareholders and
debenture holders of the company.
➢ The fact there is a debt content is Existing in the balance sheet is known as
Financial Leverage.
➢ Types of Debt Equity Ratio:
➢ Conservative DE Ratio – Where Debt Content is lesser than the Equity.
➢ Aggressive Debt Equity Ratio –Ratio in Which you have more debt content
then Equity.
➢ You opt for Aggressive Debt Equity Ratio when you have good Profits.
Proprietary Ratio = Proprietors Fund/ Total Tangible Assets
Significance: For every 100Rs. Invested In the business how much belongs to the
proprietor.
Use of Proprietary Ratio is to let know the outside stakeholders like investors,
venture Capitalist, to check the financial risk of the company and the safety of the
company. Also, inside Stakeholders like Employees are also Interested.
Thumb Rule: 0.67:1
Capital Gearing Ratio = Fixed Interest and Dividend Bearing Securities /ESHFS
‘
We Calculate this ratio to get how geared up is the business.
If the Capital Gearing Ratio = 1, the company is Equally geared.
Less than 1 = Low Geared
More than 1 = Highly Geared.
Fixed Assets to LTFs Ratio = Total Net FAs/Total LTFs

Were
Total Long-term Fund = Capital Employed
Thumb Rule: 75 to 80% should be invested into Fixed Assets.
Solvency Ratio = Total External Funds/Total Assets (Excluding Fictitious

Assets)
Fixed Assets to Net Worth Ratio = Fixed Assets/Net Worth (Equity SHFS)
7/05/2022
Turnover Ratio
➢ Working Capital Turnover Ratio
➢ Fixed Assets Turnover Ratio
➢ Net Worth Turnover Ratio
➢ Capital Turnover Ratio
➢ Inventory Turnover Ratio/Stock Turnover Ratio
➢ Debtors Turnover Ratio
➢ Debt Collection Period
➢ Creditors Turnover Ratio
➢ Debt Payment Period/Credit Payment Period
Q) 8.
The Following is the balance sheet of M/s Ram & Co. as on 31 st March,2013.
Capital & Liabilities Amount Assets Amount (Rs.)
(Rs.)
Equity Share Capital 20,00,000 Goodwill 5,40,000
PSC 8,80,000 Machinery 13,00,000
Securities Premium 2,08,000 Building 14,08,000
P&L A/C 10,72,000 Land 1,44,000
Debentures 5,12,000 Cash 2,56,000
Creditors 3,68,000 Debtors 3,04,000
Bills Payable 32,000 Bills Receivable 4,96,000
Provision for Taxation 96,000 Stock in Hand 7,84,000
Dividend Payable 64,000
52,32,000 52,32,000
Net Sales = 1,52,00,000

COGS = 60,00,000
Comment on the Short Term and Long-term Solvency of the business using
Ratios. Also check the Turnover ability of the business.
Redrafted Balance Sheet

Particulars Amount (in Rs.)
Cash 2,56,000
Absolute Liquid Assets 2,56,000
Add: Debtors 3,04,000
Bills Receivable 4,96,000
Total Liquid Assets/Quick Assets 10,56,000
Add: Stock in Hand 7,84,000
Total Current Assets…(A) 18,40,000
Current Liabilities
- Creditors 3,68,000
- Bills Payable 32,000
- Provision for Taxation 96,000
- Dividend Payable 64,000
Total Current Liabilities…. (B) 5,60,000
Net Working Capital (C) (A-B) 12,80,000
Add: Fixed Assets
- Goodwill 5,40,000
- Machinery 13,00,000
- Building 14,08,000
- Land 1,44,000
Total Fixed Assets (D) 33,92,000
Capital Employed. (E) (B+D) 46,72,000
Less: Long Term Borrowing (5,12,000)
(Debentures)
SHFHS 41,60,000
Less: PSC 8,80,000
ESHFHS 32,80,000
ESHFS Represented by
- ESC 20,00,000
- Securities Premium 2,08,000
- P&L A/c 10,72,000
ESHFS/Net Worth 32,80,000
Calculation of Liquidity Ratios to check short term solvency.

Absolute Liquid Ratio = Absolute Liquid Assets/Current Liabilities
= 2,56,000/5,60,000
= 0.46 times.
Quick Ratio = Quick Assets/ Current Liabilities

= 10,56,000/5,60,000
= 1.89 times.
Current Ratio = Current Assets/Current Liabilities

= 18,40,000/5,60,000
= 3.29 times
Long Term Solvency Ratio

Debt Equity Ratio = Debt/Equity (SHFS)
= 5,12,000/41,60,000 = 0.12 times
Proprietary Ratio = Proprietors Fund (SHFS)/Total Tangible Assets

= 41,60,000/46,92,000 = 0.89 times
Were
Total Tangible Assets = Total Assets – Goodwill – FA
= 52,32,000 – 5,40,000
= 46,92,000
Therefore, out of every rupee invested in the business approx. .90 belongs to the
shareholders. Thumb Rule is 2:3
Capital Gearing Ratio = Fixed Interest and Dividend Bearing Security /ESHFS
= 13,92,000/32,80,000 = 0.42 times.
Fixed Assets to Long term Fund = Fixed Assets/LTF (Capital Employed)

= 33,92,000/46,72,000
= 0.72 times
Solvency Ratio = Total External Fund/Total Assets (Excluding FA)

= 5,12,000 + 5,60,000/52,32,000
= 0.20 times.
Therefore, Business is very Solvent
Fixed Assets to Net Worth Ratio = Fixed Assets/Net Worth (ESHFS)

= 33,92,000/32,80,000
= 1.03 times.
More than the Net Worth we have invested in Fixed Assets.
Turnover Ratios:
Total Assets Turnover Ratio = Net Sales/Total Assets (Less FA)
= 1,52,00,000/52,32,000 = 2.91times
It means for every rupee of investment in total Assets you are making a sale of 3rs.
Working Capital turnover Ratio = Net Sales/Net Fixed Assets

= 1,52,00,000/46,72,000 = 3.25 times.
Net Worth Turnover Ratio = Net Sales/Net Worth (ESHFS)

= 1,52,00,000/32,80,000
= 4.63 times.
9/05/2022
Q) Ratio of Gross Profit on Cost is 33.33%, Total Sales Rs. 18,00, 000.Cacluate
the Gross Profit and the cost.
When Cost is 100, Profit is 33.33%
If the Sales is 100, Profit -?
Gross Profit on Sales = 33.33/133.33 * 100
= 25%
COGS = Sales – Profit

= 18,00,000 – 4,50,000
= 13,50,000
Profit = 4,50,000
Q) If the Rate of Gross Profit on Sales is 25%. Convert this rate to on Cost
When Sales is 100 Profit is 25

Cost is 75 & Profit is 25
Rate of Profit on Cost = 25/75 * 100 = 33.33%
Therefore, the Profit on Cost is 33.33%.
Q) If the Cost of Goods sold is Rs. 75,00,000 and the rate of Sales is 20%.
Calculate the rate of Profit on Cost. Also show the Sales and the Profit
Amount.
When Sales is 100, Profit is 20

When Cost is 80, Profit is 20
COGS Rate = 80%

75,00,000/80 * 100 = 93,75,000
93,75,000 – 75,00,000
Rate of Profit on Sales = 18,75,000
Q. If Sales are Rs. 12,50,000 and rate of GP on cost is 20%, Calculate GP and
COGS.
Solution:
If cost is 100, Gp is 20, Sales = 120%
If Sales is 100, GP is 16.67%, COGS = 83.33%.
GP = 2,08,375
COGS = 10,41,625
Sales = 12,50,000
OR
GP = 12,50,000 * 20/120
= 2,08,333.33
COGS = 10,41,666.67.
16/05/2022
Q) Following are the balance sheet of Apex Ltd For the year ending 31 st
December 2011 and 31st December 2012.
Liabilities 2011 2012
(Amount in (Amount in Rs,)
Rs.)
Preference Share Capital 17,50,000 31,50,000
Equity Share Capital 21,00,000 42,00,000
General Reserve 14,00,000 17,50,000
P&L A/C 7,00,000 7,87,500
Debentures 7,00,000 35,00,000
Bills Payable 1,40,000 1,75,000
Dividend Payable 1,40,000 1,75,000
Outstanding Expenses 70,000 87,500
Total 70,00,000 1,38,25,000
Assets
Fixed Assets
Gross Block 63,00,000 1,40,00,000
Less: Depreciation 28,00,000 52,50,000
Net Block 35,00,000 87,50,000
Investment 10,50,000 7,00,000
Bills Receivable 7,00,000 12,25,000
Inventories 14,00,000 21,00,000
Cash 3,50,000 10,50,000
Total 70,00,000 1,38,25,000
Solution:
Redrafted Balance Sheet for 2011 & 2012
Cash/Absolute Liquid Assets 3,50,000 10,50,000
Add: Bills Receivables 7,00,000 12,25,000
Total Quick Assets 10,50,000 22,75,000
Add: Inventories 14,00,000 21,00,000
Total Current Assets (A) 24,50,000 43,75,000
Current Liabilities
Bills Payable `1,40,000 1,75,000
Dividend Payable 1,40,000 1,75,000
Outstanding Expenses 70,000 87,500
Total Current Liabilities(B) 3,50,000 4,37,500
Net Working Capital (C) (A-B) 21,00,000 39,37,500
Fixed Assets
Net Block 35,00,000 87,50,000
Investment 10,50,000 7,00,000
Total Net Fixed Assets(D) 45,50,000 94,50,000
Capital Employed (C+D) 66,50,000 1,33,87,500
(-) Debentures 7,00,000 35,00,000
S.H.F. S 59,50,000 98,87,500
(-) PSC 17,50,000 31,50,000
ESHS 42,00,000 67,37,500
Short Term Financial Ratios

Particulars For 2011 For 2012
Absolute Liquid Ratio (Absolute 3,50,000/5,50,000 = 10,50,000/4,37,500
Liquid Assets/Current Liabilities) 1 time. = 2.4 times
Quick Ratio (Quick Assets/CL) 10,50,000/3,50,000 22,75,000/4,57,500
= 3 times = 5.2 times.
Current Ratio (CA/CL) 24,50,000/3,50,000 43,75,000/4,37,500
= 7 times. = 10 times.
Note: You can write comment here also for this ratio or you can write at the end.
Comments:
Though the Liquidity Position of the company is outstanding, the company is losing
on there potential Profits and did know where to make their investments. They
should have invested the excess money where the company could get return.
Long Term Financial Ratios:
Particulars 2011 2012
DE Ratio = 7,00,000/59,50,000 35,00,000/98,87,500
[Debt (TLTB)/Equity(SHFS)] = 0.12 times. =0.35 times
Proprietary Ratio 59,50,000/70,00,000 98,87,500/1,38,25,0000
= SHFS/Total Tangible Assets = 0.85 times =0.71 times
Capital Gearing Ratio = 24,50,000/42,00,000 66,50,000/67,37,000
(FIDBS/ESHNW) = 0.58 times =0.99 times
Fixed Assets to LTFs Ratio 45,50,000/66,50,000 94,50,000/1,33,87,500
= FA/LTF(CE) = 0.68 times = 0.71 times
Solvency Ratio = Total External 10,50,000/70,00,000 39,37,500/1,38,25,000
Liabilities (LTB + CL) / Total = 0.15 times = 0.28 times.
Assets (Excluding FA)
Fixed Assets to Net Worth Ratio 45,50,000/42,00,000 94,50,000/67,37,500
= Fixed Assets/NW(ESHFS) = 1.08 times = 1.40 times.
Comments: Written on Own

➢ They have a very Conservative Debt Equity Ratio
➢ There is a good safety for people as shareholders.
➢ The company is low geared as capital gearing ratio is less than 1 for year
2011. In second year, the company is almost evenly geared.
Module 6 – Business Forecasting
PROBLEMS
1) The following is the income statement of ABC Ltd for the year ending
31st December, 2013. Prepare projected income statement for 2014
Correction Done in Question: Tax rate Changed to 25% and balance

accordingly.
Particulars Amount (Rs)

Sales 4,00,000
Less: Cost of goods sold 3,00,000
Less: Depreciation 20,000
Less: Operating Expenses 50,000
Profit before interest and tax 30,000
Less: Interest 5,000
Profit before tax 25,000
Less: Tax @ 25% 6,250
Profit after tax 18,750
Less: Dividend paid 2,500
Additional Information:
(1) Sales to increase by 20%
(2) Dividend to be distributed after retaining Rs 14,000 in the business.
Solution:
Projected Income Statement for 2014
Particulars Amount
Sales 4,80,000
Less: COGS (75%) 3,60,000
- Depreciation 20,000
- Operating Expenses 60,000
(4,80,000*12.5%)
OPBIT/EBIT 40,000
(-) Interest 5,000
EBT 35,000
(-) Tax Rate @25% (8,750)
EAT 26,250
(-) ED 12,250
Working Notes
1) COGS Ratio = COGS/NS * 100
= 3,00,000/4,00,000 * 100
= 75%
2) Operating Expenses Ratio = Total Operating Expenses/Net Sales * 100

= 50,000/4,00,000 * 100
= 12.5%
Note:
Depreciation and Interest are assumed to be Fixed.
2)
Correction Done in Question – Corporate Tax 25% in income statement and
adjustment c Tax rate Increases to 30%.
Following is the income statement of SMY Ltd; for the year ending 31 st
December 2009
Income Statement for 2009
Particulars Amount (Rs in thousands)
Sales 2,000
Less: Cost of goods sold 1,200
Gross Profit 800
Less: operating expenses 300
Profit before interest & tax 500
Less: Interest 100
Profit before tax 400
Less: Tax @ 25% 100
Profit after tax 300
Less: Dividend paid 120
Retained Earnings 180
a) Sales to increase by 20%
b) Interest increases by 5%
c) Tax rate increases to 30%.
d) Dividend is paid at 40% of profit after tax.
Prepare Projected Statement for 2010.
Solution:
Projected Income Statement for 2013
Particulars Amount
Sales 24,00,000
Less: COGS (60%) (14,40,000)
Less: Operating Expenses (3,60,000)
OPBIT/EBIT 6,00,000
(-) Interest (1,05,000)
EBT 4,95,000
(-) Tax Rate @30% (1,48,500)
EAT 3,46,500
(-) ED 1,38,600
Retained Earnings 2,07,900
Working Notes:
1) COGS Rate = COGS/NS * 100
= 1,200/2,000 * 100
= 60%
2) Operating Expenses Ratio = Total Operating Expenses/NS * 100

= 300/2000 * 100
3) Interest = 1,00,000 + 5%
= 1,05,000.
3)
Correction in Question: For Both Income statement and adjustment took tax
rate as 25%.
The following is the income statement of KP Ltd for the year ending 31 st
March 2011:
Particulars Amt (Rs in lakhs)

Sales 5,600
Less: Cost of goods sold 4200
Gross Profit 1400
Less: Depreciation 280
Operating Expenses 700 980
EBIT 420
Less: interest 70
EBT 350
Less: Tax @ 25% 87.5
EAT 262.5
Less: Dividend paid 60
Retained Earnings 202.5
a) Additional Borrowings of Rs 1,40,00,000 @ 10%.
b) Sales to increase by 30%
c) Tax rate – 25%
d) Dividend is 25% of profits.
Solution:
Important Questions for Final Exam from this chapter – 4 marker

1. What are the Components of Business Forecasting?
2. What are the Uses of Business Forecasting?
NOTES
20/05/2022
Section - B
Q) Elucidate the following
- Any Convention and Concepts which is asked in the question
Write meaning, Significance and Example.
Section - A
Q) Stock Turnover Ratio = 6 times, COGS = Rs. 17,85,000. Closing stock is less
than the opening stock by 10,000. Find Out the value of the Opening Stock and
Closing Stock?
Solution:
STOR = 6 times
COGS = 17,85,000
OS = X
CS = X – 10,000
STOR = COGS*2/OS+CS
6 = 35,70,000/x+x-10,000
12x – 60,000 = 35,70,000
12x = 36,30,000
X = 36,30,000/12
Opening Stock(X) = 3,02,500
Closing Stock = 2,92,500
Section C
19/05/2022
Q. Redraft the following Profit and Loss account and Balance sheet of a
manufacturing company and Comment on the short term, Long term and
Turnover ability of the business.
Profit and Loss Account for the year ended 31st December 2013.
Particulars Amount Particulars Amount
To Stock 20,000 By Sales 1,50,000
To Purchases 1,05,000 By Stock 35,0000
To Direct Labor 10,000
To gross Profit C/d 50,000
1,85,000 1,85,000
To Administrative 20,000 By Gross Profit b/d 50,000
Expenses
To Selling Expenses 10,000
To Non-Operating 5,000
Expenses
To Net Profit 15,000
50,000 50,000
Balance Sheet as on 31st December 2013

Liabilities Amount Assets Amount
(Rs.) (Rs)
Equity Capital 2,00,000 Plant & Machinery 50,000
P&L A/c 35,000 Building 70,000
Reserve Fund 15,000 Motor Car 80,000
Current Liabilities 60,000 Furniture 10,000
Stock 35,000
Debtors 20,000
Cash & Bank 45,000
3,10,000 3,10,000
Solution:
Calculation of Turnover Ratios
Working Capital Turnover Ratio = Net Sales / Net Working Capital
= 1,50,000/40,000
= 3.75 times.
NWC = CA-CL
NWC = 11,00,000 – 60,000 = 40,000
Fixed Assets Turnover Ratio

= Net Sales/Net Fixed Assets
= 1,50,000/2,10,000
= 0.71 times
Total Assets Turnover Ratio

= Net Sales/Total Assets (Except FA)
= 1,50,000/3,10,000
= 0.48 times.
Capital TR
= Net Sales/CE
= 1,50,000/2,50,000 = .6 times
Where, Capital Employed = NWC+ NFA
Net Worth Turnover Ratio = Net Sales/ESHFSNW

= 1,50,000/2,50,000 = 0.6 times
Stock Turnover Ratio = COGS/Average Stock
Were, COGS = Net Sales – Gross Profit
= 1,50,000 – 50,000
= 1,00,000
OR
COGS = OS + Purchases + DE – Closing Stock

= 20,000 + 1,05,000 + 10,000 – 35,000
= 1,00,000
STOR = 1,00,000/27,500 = 3.64 Times.
Note:
Stock Turnover Ratio talks about Rapidity of turnover for every average stock
lying in the go down.
Debtors Turnover Ratio = Net Credit Sales/Average Receivables

= 1,50,000/20,000 = 7.5 times
Note:
In absence of Opening balance of receivables, closing balance will be
considered as average receivables.
If in the question there is nothing given regarding cash sales , then we consider
Sales as Net credit Sales.
Average Debt Collection Period = NO. of Days/Weeks/Months in a year
DTOR
= 12/7.5 = 1.6 months.
CTOR = Net Credit Purchases/Average Payables

= 1,05,000/15,000 = 7 times.
Credit Payment Period = No. of days/weeks/months in a year

CTOR
= 12/7
= 1.71 months.
Note:
Non-operating Ratio, Non-Operating Expenses like Loss on Sale of Investment,
Profit on sale of Investment. are calculated to know how much profit is
affected in a particular year due to non-operating expenses or Profits which
have impact only on particular year. This Profit or Loss may not be reflected in
next year statement as it effects only the year it occurs and the profit expected
.In the subsequent years statement may assumed to be increased or
decreased.
20/05/2022
Q) A company Produces three Product. The cost data is as Under
Particulars A B C
Direct Material (Rs.) 128 304 234
Direct Labor Rate per Hour Hours Hours Hours

Department 1 5 36 20 40
Variable Overheads 32 18 42
Fixed O/Hs - Rs. 8,00,000 per annum.

The budget was prepared at a time when the market was sluggish. The
Budgeted quantities are selling prices are as below
Product Budgeted Quantity Selling Price (Rs. per
Unit)
A 9,750 540
B 7,800 560
C 7,800 800
Later the market improved and sales quantities could be increased by 20%
for Product A and 25% each for products B and C. The Sales manager
confirmed that the increased quantities could be achieved at the prices
originally budgeted. The production manager stated that the output cannot
be increased beyond the budgeted level due to the limitation of direct labor
hours in Department 2.
You are required to
i)Present a statement of budgeted profitability.
ii) Find Optimal Product mix and calculate optimal Profit.
Solution:
Statement showing the Profitability of Product A, B and C
(-) VC
Direct Material (128) (304) (234)
Direct Labor
- Department 1 180 100 200
- Department 2 60 48 84
- Department 3 80 40 160
Total Labor (320) (188) (444)
Variable O/Hs (32) (18) (42)
Total Variable Cost (480) (510) (720)
Contribution 60 50 80 190
Budgeted Quantity 9,750 7,800 7,800

Total Contribution 5,85,000 3,90,000 6,24,000 15,99,000
Less: Fixed Cost - - - (8,00,000)
Profit of Budgeted Quantity 7,99,000
Calculation of No. of Labor Hours in department 2

No. of Units 9,750 7,800 7,800
Labor Hours Per unit 10 8 14
Total Labors 97,500 62,400 1,09,200 2,69,700
Statement showing Profitability when labor hour in department 2 is limiting

factor
Contribution P/U 60 50 80
Labor Hours Per unit 10 8 14
Contribution Per Labor 6 6.25 5.71
Hour
Ranking II I III
B = 7,800 + 1,950 = 9,750*8 = 78,000
A = 9,750 + 1,950 = 11,700 *10 = 1,17,000
A+B = 1,95,000
C = 2,69,100 – 1,95,000 = 74,100
No. of Units C/UNIT Contribution

A 11,700 60 7,02,000
B 9,750 50 4,87,500
C 5,293 80 4,23,440
Total 16,12,940
Contribution
21/05/2022
Q) Using the Following information calculate LCV, LRV, GLEV, NLEV and LITV.
Also Verify your answers.
Standard Hours (ST) = 8,000 hours
Standard Wage Rate (SR) = 30 Rs.
Actual Hours (AT) = 10,000 hours
Actual Wage Bill = 2,50,000
Time Lost due to Machinery Breakdown = 400 hours.
AR = 2,50,000/10,000 – Rs. 25
.
AT Worked = 10,000 – 400
= 9,600 hours.
LCV = (ST for AOP *SR) - (AT*AR)
= (8,000 * 30) – (10,000 *25)
= 2,40,000 – 2,50,000
= 10,000 (A)
LRV = (SR-AR) AT
= (30-25)10,000
= 50,000 (F)

= (8,000 – 10,000)30
= 60,000 (A)

= (8,000 – 9,600)30
= 48,000 (A)
LITV = IT * SR
= 400 *3
= 1,200 (A)
Verification:
LCV = LRV + LEV
= 50,000 (F) + 60,000(A)
= 10,000 (A)
LEV = NLEV + LITV
= 48,000 (A) + 12,000 (A)
= 60,000 (A)

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10th Jan 2022

- Horizontal analysis/Dynamic Analysis – When we take more than one

➢ Common size statement

➢ GP/GL Vs. COGS 40% up is good

➢ Operating Expenses less than 20% is good

➢ Net operating Income and Gain /E&L – 2%

➢ Interest – LTB – its talk about Financial Leverage or Risk

Redrafted Income Statement

➢ Operating Expenses – 48.68%

➢ The Non-operating Expenses and is insignificant and the company does

➢ Interest on Long term Borrowings – 3.3 approx.

Particulars Amount Amount

Particulars Amount Amount

Net Fixed Assets (D) 15,00,000

Equity Shareholders Funds

➢ FAs to Capital Employed = 15,00,000/16,65,000 = 0.90 (Thump rule 75 –

Format of Redrafted Balance sheet

Particulars Amount Amount

➢ Conclusion – The progress of Profitability during the Current Year from

➢ Sales are increasing by 15%, whereas operating expenses increased by

➢ No doubt the company is livered, the interest quantum is increased from

Particulars 2009 2010 Absolute % Change

Total LTBs 3,50,000 5,00,000 1,50,000 42.85%

Shareholders Fund 9,30,000 10,22,000 92,000 9.89

Thumb rule = 2:1

➢ Fixed Assets have been increased by Rs. 1,10,000 approximately 14%

➢ Conclusion: Company should disinvest in WC and invest the same into LT

Particulars 2009 2010 Absolute % Change

Total Current 1,00,000 3,00,000 2,00,000 200

Total LTBs …F 2,00,000 5,00,000 3,00,000 150

Shareholders Fund 17,00,000 29,00,000 12,00,000 70.58

ESHFS 12,00,000 20,00,000 8,00,000 66.67%

Total ESHFS 12,00,000 20,00,000 8,00,000 66.67%

Fixed Asset to Long Term Fund Ratio =

8. Correct 2011 balance sheet make Reserve – 86,500 – HW

9. Change the year to 2021

Total operating Expenses 50,000 10 70,000 10

OPBIT 1,25,000 25 1,20,000 17

COGS = Net purchases + Opening Stock + Direct Expenses – Closing Stock

14. XXX & Co. Trend Analysis

Module 4 – Standard Costing / Variance Analysis

Material Cost Variances

b. Material Price variance

c. Material Usage Variance – happens because of the different quantity of

d. Material Mix Variance

Were RSQ (Revised Standard Quantity)

MCV = MPV + MUV

MUV = (SQ for actual Output – AQ) SP

= Rs. 152 (F)

MUV = (sq for actual output – AQ) SP

Standard – 40kgs @ Rs. 10

MUV = (SQ for actual output – AQ) SP

MCV = (SQ for actual output * SP) – (AQ*AP)

MCV = MUV + MPV

b. Actuals 40kgs @ Rs. 12 per kg

MUV = (SQ for actual output – AQ) SP

MPV = (SP -AP) AQ

MCV = (SQ for actual output * SP) – (AQ*AP)

For II = (2,10020) – (1400 16)

For III = (140010) – (1400 12)