Thefollowing information relating to a type of raw material is available: Annual demand Unit price Ordering cost per order

Storage cost Interest rate 2,400 units Kshs.2.40 Kshs.4.00 2% per annum 10% per annum

Calculate Economic Order Quantity. Solution EOQ = C. S EOQ = 2 x 2,400 x 4 2.40x 12% = 258 units where EOQ = Economic Order Quantity A = Annual usage = 2400 units B = Buying cost per order Rs. 4 C = Cost per unit Rs. 2.40 S = Storage cost or Carrying cost 10 + 2 = 12% Note. Storage cost includes interest also. Problem 3.5. XV Co. requires 1,500 units ofa material per month, each costing Rs. 27. Cost per order is Rs.150 and the inventory carrying charges'work out to 20% of the average inventory. Find out the economic order quantity and the number of orders per year. EOQ EOQ _ - = ~ 2.A.B C.S 2 x 18,000 x 150 27 x 20% where No. of orders per year = : = 1,000 units. A = 1,500 x 12 = 18,000 units 8.= Rs. 150 C = Rs.27 S = 20% 18,000 + 1,000 = 18 orders. A worker under the Halsey method of remuneration has a time rate of Kshs. 24 per week of 48 hours, plus a cost of living bonus of 10cents per hour worked. He is given a 20 hours task to perform, which he accomplishes in 16 hours. He is allowed 50 per cent of the time saved as premium bonus. What would be his total hourly rate of 2.A.B

earnings and what difference would it make if he were to be paid under the Rowan method? Solution Time rate per hour = Rs. 24 /48= Kshs .50 Time allowed =20 hours Time taken = 16 hours Time saved = 20 - 16 = 4 hours Time wages = 16 hours @ .50 = Kshs. 8 Halsey Bonus = . 0.50 x 2 hours = Kshs. 1 Cost of living bonus = 16 hrs. @ .10 = Kshs. 1.60 Total earnings = Time wages + Bonus + Cost of living bonus =8+ 1 + 1.60=Kshs. 10.60 Total hourly rate =Kshs. 10.60/ 16 hours = 0.66 Rowan Bonus Time saved . = Time rate x Time saved x Time taken Time allowed =0.50x (4/20) x 16 =Kshs.1.60

Total earnings = 8 + 1.60 + 1.60 = Kshs. 11.20 Total hourly rate=11.20/ 16 hours = Kshs 0.70

In a factory Ram and Sham produce the same product using the same input of same material and at the same normal wage rate. Bonus is paid to both of them in the form of normal time wage rate adjusted by the proportion which time saved bears to the standard time for the completion of the product. The time allotted to the product is fifty hours. Ram takes thirty hours and Sham takes forty hours to produce the product. The factory cost of the product for

Ram is Kshs 3,100 and for Sham Kshs. 3,280. The factory overhead rate is Kshs. 12 per man hour. Calculate (i) Normal wage rate; (ii) Cost of materials used for the product; and (iii) Input of material, if the unit material cost is Kshs. 16. Solution Ram Factory cost Factory overhead Less: Ram (30 hrs. x 12) Sham (40 hrs. x Rs. 12) Prime Cost 2,800 2,740 360 480 3,100 Sham 3,280

Difference in wages = 2,800 - 2,740= 60 Calculation of wage rate Suppose wage rate = x Wages of Ram = 30x + 30x x 20/ 50 Wages of Sham = 40x + 40x x I0/50 Thus the equation is : (40X + 40x x 10/50) - (30x + 30x x 10/50)= 60 Solve the equation and derive the value of x (40x+8x) - (30x+ 12x) =60 48x-42x =60 6x =60 x =10 Thus wage rate = Kshs 10 per hour Thus wages of Ram =30 hrs.x 10 + (30 x 10 x 20/50) =420 Wages of Sham = 40 hrs x 10 (40 x 10x 10/50) = 480 Material cost in Rams job = 2740 -420 =2320

Shams job= 2800-480 = 2320 Material input = 2320/16 = 145 units

Problem 4.15. The standard time ofjob X is 100 hours. Thejob has been completed by Amar in 60 hours, Akbar in 70 hours and Anthony in 95 hours. The bonus system applicable to the job is as follows: Percentage a/lime saved to time allowed Bonus Saving upto 10% 10% of time saved From 11 % to 20% 15% of time saved From 21 % to 40% 20% of time saved From 41% to 100% 25% of time saved The rate of pay is Re. 15 per hour. CalJ;;ulate the total earnings of each worker and also the rate of earnings per hour. Solution (B.B.M. Bangalore. Adapted; CA. Inter) Statement of Total Earnings and Rate of Earnings Per Hour Standard time ofjob (Hrs.) (A) Time taken on the job (Hrs.) Time saved (Hrs.) Percentage of time saved to standard time Bonus (as percentage of time saved) (B) 01< Bonus hours . Total hours to be paid (A + B) Total earnings @ Rs. 15 per hour Rs. 01< Earnings per hour Rs. Amar 100 60 40 40% 20% ." Working Notes: (i) Bonus hours = Time saved x Bonus%. (ii) Earnings per hour = Total eamings + Time taken.

Indian Manufacturing Company has three production department A, Band C and two service departmens X and Y. The following is the budget for Feb. 2003. Total A Direct materials Direct wages 2000 Factory rent Power Depreciation Other overheads 9000 4000 2500 1000 1000 5000 B 2000 2000 C 4000 8000 X 2000 1000 Y 1000

Area sq. ft. Capital value of Assets 10 Machine hours 1000

500 20 1,000 1000

250 40 2,000

500 20

250 10 4,000

500

Horse power of machines 15

50

40

20

15

A technical assessment for apportionment of the costs of service departments is as under:

A % Service Department X 45 Service Department Y 60

B % 15 35

C % 30 -

X % 5

Y % 10 -

You are required to distribute overheads to various departments and redistribute service department costs to production department. Also compute machine hour rates for production departments A, Band C. Solution
Overhead Distribution Statement Item Direct materials Direct wages Factory rent Power Depreciation Other overheads TOTAL Actual Area sq. ft. H.P. x M. hours Capital values x M.hours D. wages Basis of apportionment Actual 3000 4000 TOTAL A 3000 1000 2500 1000 9000 500 500 100 2500 B 1000 800 400 1000 C 1000 500 800 400 4000 X 2000 2000 1000 150 50 500 250 50 1000 Y 1000

22500 4100 2700 620 1890 3432 128 18 630 2002 43 11 1260 86 -

4200 5300

(4200) 420 286 (5720)

(286) 29 (29)

Notes:

1. Costs of service departments X and Y have been distributed by Repeated Distribution Method. 2. Power has been apportioned on the basis of H.P. x Machine hours. However, either H.P. or machine hours may also be taken as the basis of apportionment. 3. Depreciation has been apportioned on the basis of capital values x machine hours. However, either capital values or machine hours may also be taken as the basis of apportionment.
Problem 5.6. A company has three production cost centres Band C and two service cost centres X and Y. Costs allocated to service centres are required to be apportioned to the production centres to find out cost of production of different products. It is found that benefit of service cost centres is also received by each other along with the production cost centres. Overhead costs as allocated to the five cost centres and estimates of benefit of service cost centres received by each of them are as under: Cost Centres A B C X Y Overhead Costs as allocated ( Rupees) 80,000 40,000 20,000 20,000 10,000 Estimates o/Benefits received/rom Service Centres % x 20 30 40 Solution 10 y 20 25 50 5 Required: Work out final overhead costs of each of the production departments including re-apportioned cost of service centres using (a) Continuous distribution method and (b) Simultaneous equation method. (J.C.W.A., Inter) (a) Secondary Overhead Distribution Summary ( Repeated or Continuous Distribution Method) Particulars Production Deptts. Service Deptts. Overhead costs Overheads of X Overheads ofY Overheads of X Overheads of Y Overheads of X Final Overhead Cost of Prod. Deptt. A Rs. 80,000 4,000 2,400 120 12 B Rs. 1 86,533 40,000 6,000 3,000 180 15 1 49,196 C Rs. 20,000 8,000 6,000 240 30 X Rs. Y Rs. 1 34,271 20,000 (-)20,000 600 (-)600 3 (-)3 - 10.000 2,000 (-)12,000 - (b) Simultaneous Equation Method: Suppose overhead of X service centre is x and ofY is y. Overhead of X = 20,000 + 5% Y ... (i) OverheadofY= 10,000+ lO%x ... (ii) x = 20,000 + 0.05 y ... (i) y= 10,OOO+O.lOx ... (ii) Multiply both above equations by 20 20x =4,00,000+y ... (i) 20y =2,00,000+2x ... (ii) Multiply the equation (i) by 20 and then adding 400x= 80,00,000 + 20y or 400x-20y =80,00,000 -2x+20y= 2,00,000 398x = 82,00,000 x = 82,00,000 + 398 = Rs. 20,603 (overheads of X ) y = 10,000 + (0.10 x 20,603) = Rs. 12,060 (Overheads ofY) Particulars Secondary Overhead Distribution Summary ( Simultaneous Equation Method) Overhead costs Overheads of X Overheads ofY Overhead cost of Production Deptt. 90% of 20603 95% of 12060 A Rs. 80,000 4,121 2,412 Production Deptts. 86,533 B Rs. 40,000 6,181 3,015 49,196 C Rs. 20,000 8,241 6,030 34,721

Problem 5.8. The following particulars relate to processing machine treating a typical material: (a) Costofmachine-Rs. 10,000 (b) Estimated life - 10 years (c) Scrap value Rs. 1,000 (d) Yearly working time ( 50 weeks of 44 hours each) - 2,200 hours (e)

Machine maintenance 200 hours p.a. (f) Setting up time estimated at 5% oftotal productive time and is regarded as productive time (g) Electricity is 16 units per hour at 10 paise per unit (h) Chemical required w~kly Rs. 20 (i) Maintenance cost per year Rs. 1,200 (j) Two attendants control the operations of machine together with 6 other machines. Their combined weekly wages are Rs. 140 (k) Departmental overhead allocated to this machine per annum Rs. 2,000 You are required to calculate the machine hour rate. ( B. Com., Banga/ore) Solution Standing Charges 1. Departmental overhead 2. Attendants' wages ( Calculation of Machine Hour Rate Per Year Rs. 1407x50 ) 2,000 1,000 3,000 Per Hour Rs. Standing charges per hour ( Rs. 3,000 + 2,000 hrs.) Operating Charges l. Depreciation 3. Chemicals ( 10,0001,000 ) 2,000 x 10 2. Maintenance ( 1,200 + 2,000 ) 20X50) ( 2,000 4. Power ( 16 units @ 10 paise per unit) Mac/line Hour Rate 1.50 0.45 0.60 0.50 llQ... Working Note: Calculation of effective hrs. Total machine hours ( 50 x 44 ) Less: Maintenance hours Effective working hrs. Problem 5.9. From the following particulars compute Machine Hour Rate: 2,200 200 2,000

. Problem 5.17. June. Material used Direct wages Direct labour hOllrs worked Hours of machine operation Overhead charges allocated to the department Rs. Cost data of a particular work order carried out above department during June are given below: Material used Rs.8,000 Direct wages Rs.6,250 Labour hours booked 3,300 Machine hours booked 2,400 What would be the factory cost of the work order under the following methods of charging overheads. (i) Direct labour cost rate; (ii) Machine hour rate; and (iii) Direct labour hour rate. Following particulars related to the production department ofa factory for the month of ' Solution Computation of Factory Overheads Rates : (i) Direct Labour Cost Rate: (ii) Machine Hour Rate: (iii) Direct Labour Hour Rate: ?verhead Direct wages x 100 Overhead No. of machine hours No. o;er:ead h 0 la our ours Statement of Factory Cost Direct material Direct wages Prime Cost Factory overhead: Direct labour cost rate R.I'. 8,000 (i) 125% ofRs. 6,250 (ii) @ Rs. 3.60 for 2,400 hrs. (iii) @ Rs. 4.50 for 3.300 1m. 6,250 Factory Cost 14,250 7,812.50 22,062.50 Machine hOllr /'CIte R.I'. 8,000 6,250 14,250 8,640 22,890 Direct labour hOllr rate R.I'. 8,000 6,250 14,250 14,850 29,100

Problem 5.18. The following figures have been extracted from the boo.ks ora manufacturing company. All jobs pass through the company's two departments: Material used Direct labour Factory overheads Direct labour hours Machine hours The following information relates to Job No. 47 : Working Deptt. Rs.6,000 Rs.3,000 Rs.l,800 11,000 10,000 Finishing Deptl. Rs. 500 Rs.I,500 Rs.I,200 5,000 2,000 Working Dept!. Rs.120 Rs. 65 265 255 Finishing Dept!. Material used Rs.l0 Direct labour Rs.15 Direct labour hours 70 Machine hours 25 You are requ ired: (a) to enumerate four methods of

absorbing factory overheads department under the methods quoted; and (b) to prepare a statement showing the different cost results for Job No. 47 under each offour methods referred to. ( B.ColI/ , Jladras; Delhi) Solution (i) (ii) Material Cost % Rate (III) (I\,) = Overheads Direct material Overheads Direct wages x 100 Direct Labour Cost % Rate x Machine Hour Rate Overheads Machine hmll s

Problem 5.19. In a manufacturing unit, overhead was recovered at a pre-determ ined rate of Rs. 25 per man-day. The total factory overhead expenses incurred and the man-days actually worked were Rs. 41.50 lakh and 1.50 lakh days respectively. O~t ofthe 40,000 units produ'ced during a period, 30,000 were sold. On analysing the reasons, it was found that 60% of the unabsorbed overheads were due to defective planning and the rest were attributable to increase in overhead costs. How would under/over-absorbed overheads be treated in cost accounts? ( B.Com. Hons., Delhi) Solution Less: Actual overhead incurred Overhead absorbed ( Rs. 25 x 1.50 lakh hours) Under-absorbed overheads Rs. (in lakh) 41.50 37.50 4.00

60% of this Rs. 418khs of unabsorbed overheads which is due to defective planning (abnormal reasons) should be charged to Costing Profit and Loss Account and the remaining 40%, i.e., Rs. 1.60 lakhs should be charged to the cost of sales and closing stock by using a supplementary rate. Rs. (in Jakhs) 2.40 Charge to Costing Profit and Loss Account (60% ofRs. 41akhs) Supplementary Rate = Rs. 1.60 lakhs' + 40,000 units = Rs. 4 per unit Charge to cost of sales (30,000 units @ Rs. 4) 1.20 Charge to closing stock (10,000 units @ Rs. 4) 0.40 Under-absorbed overhead 4.00

Problem S.21. XYZ Co. uses a historical cost system and applies overheads on the basis of pre-determined rates. The foHowing data are available from the records of the company for the year ended 31 st March, 2003 : Rs. Manufacturing overhead incurred 8,50,000 Manufacturing overhead applied 7,50,000 Work-in-progress 2,40,000 Finished goods stock 4,80,000 Cost of goods sold 16,80,000 Apply two methods for disposal of under-absorbed overhead showing the implications of each method on the profit of the company. (B. Com. Hons., Delhi) Solution Manufacturing overhead - Actual Manufacturing overhead - Applied Under-absorbed overhead Rs. 8,50,000 7,50,000 1,00,000 Methods of Disposal Overheads 5.-17 Method I. Under-absorbed amount of overhead ofRs. 1,00,000 is added to cost of sales, work-in-progress and finished stock in the ratio of 168 : 24 : 48 : or 7 : I : 2 as under: Cost of sales Work-in-progress Finished stock Amount Rs. 16,80,000 2,40,000 4,80,000 24,00,000 Under-absorbed overhead

added Rs. 70,000 10,000 20,000 1,00,000 Total Rs. 17,50,000 2,50,000 5,00,000 25,00,000 Effect on Pront. The profit will reduce by Rs. 70,000 because of increase in the cost of sales which is debited to Profit and Loss Account. On the other hand, Rs. 30,000 will be credited to Profit and Loss Account on account of increase in the value of closing stock of work-in-progress and finished goods, i.e., Rs. 10,000 + 20,000. Thus the net effect of using this method is that the profit for the year will be reduced by Rs.40,000, i.e., Rs. 70,000-( 10,000+20,000). Method II. The entire amount of under-absorbed manufacturing overhead may be carried forward to the next year if it is presumed that such under-absorption has arisen due to cycl ical or seasonal fluctuations. In such a case, the profit of the current year will then be based on predetermin~d overheads and remain unaffected.

Problem 5.22. Standard production for a particular work order is 20 units per day and piece rate wages is 60 paise per unit if daily production is 20 units or more. The rate is 50 paise per unit if production is less than 20 units per day. Cost of materials is 30 paise per unit. It is proposed to charge factory overhead under one of the following methods : (i) 100% on labour cost, (ii) 80% on prime cost. Tabulate the above data in the form ofa suitable statement and indicate the factory cost per unit under each of the abo~e methods if the daily production is : (a) 15 units, (b) 20 units, (c) 25 units. Solution (i) When factory overheads are charged 01 (A) Production (units per day) Materials (@ 30 paise. per unit) Labour cost J 00% on labour cost Statement of Cost 15 Rs. 4.50 7.50 12.00 7.50 19.50 1.30 20 Rs. 6.00 12.00 18.00 12.00 30.00 1.50 :5 Factory overhead Prime Cost (B) FactoryCost Factory cost per unit (8 + A) Rs. 7.50 15.00 22.50 15.00 37.50 1.50 (ii) When factory overheads are charged at 80% on prime cost Materials (@ 30 p. per unit) Labour cost Statement of Cost Factory overhead 15 Rs. 4.50 7.50 12.00 9.60 21.60 20 Rs. 6.00 12.00 18.00 14.40 32.40 25 Rs. 7.50 15.00 22.50 18.00 40.50 Factory cost per unit (B Prime Cost (B) Factory Cost + A) 1.44 1.62 1.62

Problem 5.23. Mee~t Manufacturing Company makes several product lines which are processed through three production departments - X, Y and Z. The relevant data for a year is as follows: Factory Overh~at1 Direct Labour Direct Labour (including share of Hours Cost service department) Rs. Rs. Department X 1,24,000 80,000 1,60,000 DepartmentY 2,30,000 1,15,000 2,41,500 DepartmentZ 5,46,000 1,05,000 1,99,500 Production records at the end of the year indicated the following for the product line 'Krish'. Units produced 20,000 Deptt.X Rs. 45,000 10,000 Deptt. Y Rs. 10,500 5,000 Deptt. Z Rs. 59,500 30,000 Prime Cost Direct Labour Hours You are required to (a) Calculate the departmental and plant-wide overhead rates based on direct labour hourS ; (b) Compute the cost of'Krish' line for the year by using: (i) Plant-wide rate, (ii) Departmental rates. Solution (a) Calculation of Departmental Overhead Rates

Overhead Rate per hour = Department Y = Department X = Department Z = 1,24,000 89,000 2,30,000 1,15,000 Factory Overhead Direct Labour HO\.lrs (B. Com. Hans., Delhi) 5,46,000 1,05,000 ' I I 'd S 109 e pant-wI e rate = Rs. 1.55 per hour = = Rs. 2.00 per hour = Rs. 5.20 per hour -------.......;..-----=--Total Total Overheads of X, Y and Z Deptts. Labour Hours of X, Y and Z Deptts. 1,24,000+2,30,000+5,46,000 _ 80,000+ 1,15,000+ 1,05,000 - 9,00,000 3,00,000 = Rs 3 , per h our

(b) Statement of Cost of 'Krish' Departmental Rs. 15,500 10,000 1,56,000 1,15,000 Factory Cost 1,81,500 2,96,500 5.49 Plant-wide Rs. 1,15,000 1,35,000 2,50,000

Problem 5.24. Billa & Co. manufactures pumps which pass through three departments Foundry, Machine Shop and Assembling. The manufacturing expenses are as follows: . Foundry Machine Shop Assembling Total Rs. Rs. Rs. Rs. Direct wages 10,000 50,000 10,000 70,000 Works overhead 5,000 90,000 10,000 1,05,000 The factory cost of manufacturing an 'X' type ofpum}> is prepared by the company as follows: Rs. Rs. 16 Material Direct wages - Foundry 2 Machine Shop 4 Assembling 2 Works overhead (150% of direct wages) Total Cost It seems there is some fallacy. Try to correct it. Solution. It is apparent that the company has charged works overhead on the basis of blanket (single) rate computed as follows: _ Total works overhead - Total direct wages 105000 70 000 , x 100 . x 100 = 150% of dIrect wages And here lies the fallacy. When information is available regarding various departments, overhead absorption rates should always be computed separately for each department. In other words, mUltiple rates are always preferable to blanket rate. The overhead rates for each of the department will be as follows: ~ Foundry = Machine Shop = 5,000 10,000 90,000 50,000 10,000 10,000 On the basis of the abov~ overhead rates, revised cost sheet will appear as follows: Foundry Machine Shop Assembling Revised Cost Sheet Works overhead Foundry - 50% of direct wages Machine Shop - 180% of direct wages Assembling - 100% of direct wages Correct Factory Cost Rs. 2 4 2 1.00 7.20 2.00 Rs. 16.00 8.00 - 1020 3420

A factory uses job costing. The following data are obtained from its books for the year ended 31st December, 2002. Direct materials 90,000

Selling and dist. overheads 52,500 Direct wages 75,000 Administration overheads 42,000

Factory overheads 45,000 Profit 60,900 (a) Prepare a Cost Sheet indicating the Prime cost, Factory cost, Production cost, Cost of sales and the Sales value. (b) In 2003, the factory received an order for a number of jobs. It is estimated that direct materials required will be Kshs. 120,000 and direct labour will cost Kshs. 75,000. What should be the price for these jobs if factory intends to earn the same rate of profit on sales assuming that the selling and distribution overheads have gone up by 15%? The factory recovers factory overheads as a percentage of direct wages and administration and selling and distribution overheads as a percentage of factory cost, based on cost rates prevailing in the previous year. Solution Cost Sheet for the year ended 31st Dec., 2002 Direct materials Direct wages Prime Cost Factory overheads Factory Cost Administration overheads Production Cost 90,000 75,000 165,000 45,000 210,000 42,000 252,000 52,500 304,500 60,900 365,400

Selling and distribution overheads Cost of Sales Profit Sales Value Calculation of Rates :

1. Percentage of factory overheads to direct wages = 45000 x 100 = 60% 75000 2. Percentage of administration overheads to works cost = 42000 x100 = 20% 210,000

3. Selling and distribution overheads Add: 15% increase 7,875

52,500

60,375 Selling and dist. overhead % to Factory cost = 60,375 x 100 = 28.75% 4. % of profit to sales =60,900 x 100 =16.67% (1/ 6 of sales or 1/5 of total cost ) Job Cost Sheet (Statement showing Estimated Cost and Price of Jobs in 2003) Direct materials Direct wages Prime Cost Factory overheads (60% of direct labour) Factory Cost Administration overheads (20% of factory cost) Cost of Production Selling and distribution overheads (28.75% of Factory cost) Total Cost Profit (1/5 of cost) Selling Price 357,000 71,400 428,400 120,000 75,000 195,000 45,000 240,000 48,000 288,000 69,000

Problem 7.4. Nahar Electricals Ltd.,. engaged in job work, has completed all jobs in hand on 30th Dec., 2002, except Job No. 1448. The cost sheet on 30th Dec., showed direct materials and direct labour costs of Rs. 40,000 and Rs. 30,000 respectively as having been incurred on Job No. 1448. The costs incurred by the business on 31 st Dec., 2002, the last day of accollnting year, were as follows: Rs. Direct materials (Job 1448) 2,000 Direct labour (Job 1448) 8,000 Indirect labour 2,000 Miscellaneous factory overhead 3,000 It is the practice of business to make the jobs absorb factory overheads on the basis of 120% of direct labour cost. Calculate the cost of work -inprogress of Job No. 1448 on 31 st Dec., 2002. (11 COlli /lOllS, Deihl) Solution Cost of Work-in-Progress of Job No. 1448 as on 31st Dec., 2002 Direct materials ( 40,000 + 2,000) Direct labour (30,000 + 8,000) Add: Factory overhead (38,000 x 120%) Prime Cost Works Cost Rs. 42,000 38,000 . 80,000 Completed Jobs 45,600 1,25,600

Problem 7.7. X Co. Ltd. has absorbed overhead by means ofa blanket r~te based on direct labour hours. As from 1st January, 2003, it decides to adopt separate rates for the three main activitiesStore-keeping and material handling, machining and assembly. The estimates of costs and absorption rates for selling and distribution cost remain unchanged. Overhead absorption rates are: Prior to 1st January, 2003 Production overhead - Re. 0.50 per direct labour hour Selling and distribution overhed - 25% of production cost From 1st January, 2003 Production overhead : Store-keeping and material handling - Machining - Re. 0.75 per machine hour Assembly - Re. 0.30 per labour hour Selling and distribution overhead - 25% of production cost Direct costs of Job No. 40 I have been Rs. Direct material cost <Xl Direct wages: Machining 200 hours @ Re. 0.60 120 Assembly 100 hours @ Re. 0.40 40 250 Contract price of the job is Rs. 525 and it requires 180 machine hours to c6mplete. Show the job cost sheet for Job No. 40 I : (a) as it would appear if the job had been completed prior to I st January, 2003; (b) as it would appear if the job were completed in January, 2003. Solution Particulars Direct materials Direct wages: Machining 200 hours @ Re. 0.60 Assembly 100 hours @ Re. 0040 Job Cost Sheet Job No. 401 (I.CII'.A . Il1Ier) Finished before 1-1-2003 Production overhead: 300 hours @ Re. 0.50 Selling and distribution overhead 25% ofRs. 400 Prime Cost Rs. 90 Production Cost 120 40 250 Particulars Job Cost Sheet Job No. 401 Total Cost Profit Selling Price 150 400 100 500 25 525 Rs. Finished in 2003 Rs. Direct materials Direct wages: Machining 200 hours @ Re. 0.60 Assembly 100 hours @ Re. 0040 Production overhead: Store-keeping and handling \0% ofRs. 90 Machining 180 hours @ Re. 0.75 Assembly 100 hours @ Re. 0.30 Prime Cost Production Cost Selling and distribution overhead (25% ofRs. 424) Total Cost Loss Selling Price 120 40 9 135 ~ 90 160 250 174 424 \06 530 5 525

The following expenditure was incurred on a contract of Kshs. 1,200,000 for the year ending 31-12-2002. Materials 240,000 Wages 328,000 Plant 40,000 Overheads 17,200 Cash received on account of the contract to 31st Dec., 2002 was Kshs. 480,000, being 80% of the work certified. The value of materials in hand was Kshs. 20,000. The plant had undergone 20% depreciation. Prepare Contract Account. Solution Contract Account for the year ending 31st December, 2002 Particulars Particulars

Materials Wages Plant To Overheads

240,000

Materials in hand Plant in hand (40,000 less 20%) Work-in-Progress

20,000

328,000 40,000 17,200

32,000

Work certified (480,000 x I00) 80 To Notional Profitc/d 26,800 652,000 To Profit & Loss Alc 26,800 To reserve/provisional profit 14,293 12507 Notional Profit b/d

600,000

652,000

26,800

26,800

Note. Profit transferred to Profit and Loss Account is computed by the following method: Notional Profit x 2/3 x Cash ratio = ( 26,800 x 2/3 x 80/100) = 14293

Problem 8.2. Thekedar accepted a contract for the construction of a building for Rs. 10,00,000, the contractee agreeing to pay 90% of work certified by the architect. During the first year, the amounts spent were: Rs. Rs. Material 1,20,000 Machinery. 30,000 Labour 1,50,000 Other expenses 90,000 At the end of the year, the machinery was valued at Rs. 20,000 and materials at site were ofthe value of Rs. 5,000. Work certified during the year totalled Rs. 4,00,000. In addition work-in-progress not certified at the end of the year had cost Rs. 15,000. Prepare Contract Account in the books of Thekedar. Also show the various figures of profit that can be reasonably transferred to the Profit and Loss Account. (/J COlli. f)elhi) Solution Particulars Contract Account for the year ending ......... Rs. Particulars Rs. To Materials To Labour To Machinery To Other expenses To Notional Profit cld To P& LAic To Reserve 1,20,000 1,50,000 30,000 90,000 50,000 4,40,000 15,000* 35,000 50,000 By Work-inProgress : Certified Unceltified By Machinery at site By Materials at site By Notional

Profit cld 4,00,000 15,000 20,000 5,000 4,40,000 50,000 --50,000 *Working Notes: Transfer to P & LAic = 50,000 x ~ x 90% = Rs. 15,000 Other figures that may alternatively be transferred to P & LAic may be computed as follows: I. Notional profit x.J.) = 50,000 x 1 3 = Rs ..16,667 2. Notional profit x Work celti~ed Contract pnce x Cash ratio = 50,000 x 4,00,000 10,00,000 x 90% = Rs. 18,000 . 3. NotIOnal profit x Work certified C . ontract pnce = 50,000 x 400000 " 10,00,000 = lb. 20,000 Problem 8.3. The BBA Construction Company undertakes large contracts. The following particulars relate to Contract No. 125 carried out during the year ended on 31 st March, 2003. Rs. Rs. Work certified by architect 1,43,000 Wages accrued on 31 st March, 2003 1,800 Cost of work not certified 3,400 Direct expenditure 2,400 Plant installed at site 11,300 Materials on hand on 31 st March, 2003 1,400 Value of plant on 31 st March, 2003 8,200 Materials returned to store 400 Materials sent to site 64,500 Direct expenditure accrued on 31 st March, 2003 200 Labour 54,800 Contract price 2,00,000 Establishment charges 3,250 Cash received from contractee 1,30.000 Prepare a Contract Account for the period ending 31 st March, 2003 and find out the profit. It was decided to transfer 2/3 of the profit on cash basis to Profit and Loss Account. Solution Particulars To Materials sent to site To Labour To Establishment charges To Direct expenses To Wages accrued To Direct expenses accrued To Plant at site 1'0 NotionalProlit c/d Cost and ;\/cll1a!{ement Accounting Contract No. 125 Account for the year ending 31st March, 2003 Rs 64,500 54.800 3,250 2,400 1,800 200 11.300 18.150 Particu/crrs By Materials returned l3y Materials in hand By Work-in-Progress : Certified Uncertified By Plant at site Us, 400 1.400 '10 I' & L /l.lc ( 18.150 x To Resene '3 2 I JO,OOO ) x 1.43.000 1.56.400 1.43.000 3.400 8.200 11.000 7,150 18.150 By Notionall,'rofit bid 1.56.400 II!.! 50 18.150

A product passes through three processes to completion. During the quarter ending 31st March, 2004 the cost and production were as under: Processes Direct material 34,620 Direct labour Direct expenses 7,260 TOTAL 84,820 120,000 5,000 60,000 10% A B 20,000 30,000 2,260 5% C 30,200 40,000 10% 50,000

Production overhead Normal loss in input

Sale of scrap per unit Production in units

920

30 870

50 800

60

1000 units of Kshs. 50 per unit were introduced to process A. There was no stock of materials or work-inprogress in any process department at the beginning or end of the period. Production overhead is allocated to each process on the basis of 50% of direct labour cost. Prepare process accounts. Solution:

Input material Direct material Direct Labour Direct expenses Production overheads Abnormal gain 20 1020

Unit 1000

@ 50/=

Process A amt 50000 Normal Loss 20000 Transfer to department B 30000 5000 15000 2,600 122,600

Unit 100 920

@ 30/=

amt 3000 119,600

1020

122,600

Value of abnormal gain = 120,000-3000 x 20 units = Kshs 2,600 1000 - 100

Process B Unit Input material 920 Direct material Direct labour Direct expenses Production overheads 920 @ amt 119,600 Normal Loss 30200 Abnormal loss 40,000 Transfer to department C 2260 2000 212,060 Unit 46 4 870 920 @ 50/= amt 2300 960 208,000 212,060

Value of abnormal loss = 212,060 -2300 x 4 units =960 920 -46

Process C Unit @ amt Unit @ amt

Input material 870 Direct material Direct Labour Direct expenses Production overheads Abnormal gain 17 887

208000 Normal Loss 87 34200 Transfer to Finished stock 800 50000 25000 6,800 325,220 870

60/=

5,220 320,000

325,220

Value of abnormal gain = 318,420-5200 x 17 units = Kshs 6,800 870 - 87

Problem 9.3 (Normal alld Abnormal Loss) Process Costing 9.33 600 kg. of a material was charged to Process A at the rate ofRs. 4 per kg. The direct labour accounted for Rs. 200 and the other departmental expenses amounted to Rs. 760. The normal loss is 10% of input and the net production was 500 kg. Assuming that process scrap is saleable at Rs. 2 per kg., prepare a ledger account of process A clearly showing the values of normal ,md abnormal loss. Solution: Particulars To Materials To Direct labour To Other expenses Kg. 600 - - Process A Account 600 Rs. 2,400 200 760 3,360 Particulars By Normal loss By Abnormal loss By Process B Alc (Transfer) Kg. 60 40 500 600 Rs. 120 240 3.000 3,360 Working Notes: Cost per unit = Normal cost ----- Normal output Rs. 3,360 -120 ---'----= 600 - 60 units Abnormal loss = 40 units @ Rs. 6 = Rs. 240 Problem 9.4 (Process Accounts with Missing Figure) Rs. 6 per unit Output transferred to Process B = 500 units @ Rs. 6 = Rs. 3,000

Problem 9.7 (Process Accounts and Statement of Profit or Loss) In a factory, the product passes through two processes, A and B. A loss of 5% is allowed in Process A and 2% in Process B, nothing being realised by disposal of the wastage. During April 10,000 units of material costing Rs. 6 each were introduced in Process A. The other costs were as follows: Process A Process B Rs. Rs. Materials 6,140 Labour 10,000 6,000 Overheads 6,000 4,600 The output was 9,300 units from Process A. 9,200 units were produced by Process B which were transferred to warehouse. 8,000 units of the finished product were sold @ Rs. 15 per unit. the selling and distribution expenses being Rs. 2 per unit. Prepare (i) Process Accounts and (ii) a Statement of Profit or Loss of the firm for April, assuming there were no opening stocks of any type. (B. Com.) Solution: Particlliars To Materials To Labour To Overheads Units Cost per unit = Rs. 76,000 Particulars To Tr. from Process A To Materials To Labour To Overheads To

Abnormal gain Alc + 10,000 - - Process A Account 10,000 Rs. 60,000 10,000 6,000 Units 9,300 76,000 Particlilars 9,500 units = Rs. 8 By Normal loss By Abnormal loss By Transfer to Process B (@ Rs. 8* per unit) Units 500 200 Cost per unit = Rs. 91,140 + 9,114 units - - - 86 9,386 Process B Account Rs. Particulars 9,300 10.000 Rs. - 1,600 Units 74,400 74,400 6,140 6,000 4,600 860 92,000 By Normal Loss By Finished product Alc (@ Rs. 10 per unit) 186 76,000 = Problem 9.7 (Process Accounts and Statement of Profit or Loss) In a factory, the product passes through two processes, A and B. A loss of 5% is allowed in Process A and 2% in Process B, nothing being realised by disposal of the wastage. During April 10,000 units of material costing Rs. 6 each were introduced in Process A. The other costs were as follows: Process A Process B Rs. Rs. Materials 6,140 Labour 10,000 6,000 Overheads 6,000 4,600 The output was 9,300 units from Process A. 9,200 units were produced by Process B which were transferred to warehouse. 8,000 units of the finished product were sold @ Rs. 15 per unit. the selling and distribution expenses being Rs. 2 per unit. Prepare (i) Process Accounts and (ii) a Statement of Profit or Loss of the firm for April, assuming there were no opening stocks of any type. (B. Com.) Solution: Particlliars To Materials To Labour To Overheads Units Cost per unit = Rs. 76,000 Particulars To Tr. from Process A To Materials To Labour To Overheads To Abnormal gain Alc + 10,000 - - Process A Account 10,000 Rs. 60,000 10,000 6,000 Units 9,300 76,000 Particlilars 9,500 units = Rs. 8 By Normal loss By Abnormal loss By Transfer to Process B (@ Rs. 8* per unit) Units 500 200 Cost per unit = Rs. 91,140 + 9,114 units - - - 86 9,386 Process B Account Rs. Particulars 9,300 10.000 Rs. - 1,600 Units 74,400 74,400 6,140 6,000 4,600 860 92,000 By Normal Loss By Finished product Alc (@ Rs. 10 per unit) 186 76,000 =

Problem J 1.1. Draw up a flexible budget tor overht'ad expenses on the basis of the following data and determine the overhead rates at 70%, 80% and 90% plant capacity. Variable Overheads: Indirect labour Stores including spares Semi-variable Overheads: Power (30% fixed, 7()oA, variable) Repairs and maintenance (60% fixed, Fixed Overheads: Depreciation Insurance Salaries Total Overheads Estimated direct labour hours At 80% Ils. Capacity 40% variable) 12,000 4,000 20,000 2,000 11,000 3,000 10.000 Solution Variable overheads: Indirect labour Stores including spares Semi-variable overheads: Power: Fixed Variable Repairs and Maintenance : Fixed Variable Fixed overheads: Depreciation Insurance Salaries Flexible Budget for the period.................... 62,000 1,24,000 hrs. (BBM Bangalore: B. Com. Madurai) At 70% capacity Rs. 10,500 3,500 At 80% capacity Rs. 12,000 4,000 At 90% capacity 6,000 12,250 Rs. 13,500 4,500 1,200 700 6,000 14,000 1,200 800 6,000 15,750 1,200 900 CA) Total oVI!rhead (8) Estimt"d direct labour hours Direct labour hour rate (A + 8) 11,000 3,000 10,000 Re 0.536 11,000 3,000 10,000 0.500 11,000 3,000 10,000 0.72 Working Notes: I. 2. Indirect labour cost at 70% = 12,000 x 3. Variable power at 70% = 14,000 x 80 70 70 80 = Rs. 10,500; Similar calculation for other variable item i.e.

stores. Power - Fixed = Rs. 6,000, variable = Rs. 14,000. Direct labour hours at 70% = 1,24,000 = Rs. 12,250; at 90% = 12,000 x Similar calculation for repairs and maintenance x 70 80 Material Labour Variable overheads Fixed overheads (Rs. 1,00,000) Variable expenses (direct) Selling expenses (10% fixed) Distribution expenses (20% fixed Administration expenses (Rs. 50,000) = 1,08,500; at 90% = 14,000 x 90 80 at 90% = 1,24,000" 90 80 =Rs. 13,500 = Rs. tS,7S0 90 80 = 1,39,500

Problem 11.8. The budget manager of Jupiter Electricals Limited is preparing flexible budget for the accounting year starting from 1st July 2003. The company produces one product-DETX II. Direct material costs Rs. 7 per unit. Direct labour averages Rs. 2.50 per hour and requires 1.6 hours to produce one unit of DETX II. Salesmen are paid a commission of Re I per unit sold. Fixed selling and administrative expenses amount to Rs. 85,000 per year. Manufacturing overhead is estimated in the following amounts under specified conditions of volume ; Volume of production (in units) Expenses ; Indiret material Indirect labour Inspection Maintenance Supervision Depreciation of plant and equipment Engineering services 1,20,000 Rs. 2,64,000 1,50,000 90,000 84,000 1,98,000 90,000 94,000 1,50,000 Rs. 3,30,000 1,87,500 1,12,500 1,02,000 2,34,000 90,000 94,000 Solution Total manufacturing overhead 9,70,000 Prepare a Total Cost Budget for 1,40,000 units of production. Budget for the year ending 30th June 2004 11,50,000 Variable costs: Direct material @ Rs. 7 per unit Direct labour @ Rs. 4 per unit Salesmen's commission @ Re I per unit Indirect materials @ Rs. 2.20 per unit Indirect labour @ Rs. 1.25 per unit Inspection @ Re. 0.75 per unit Semi-variable costs: Supervision [B. Com. Hons., Delhi.] Output 1,40,000 units Rs. 9,80,000 5,60,000 1,40,000 3,08,000 1,75,000 1,05,000 Maintenance - - - - Fixed Variable @ Rs. 1.20 per unit Fixed Variable @ Re. 0.60 per unit Fixed Costs : Depreciation Engineering services Selling and distribution expenses 54,000 1,68,000 12,000 84,000 Total 90,000 94,000 85,000 28,55,000 Working Notes: Fixed and variable components of each item of cost are determined as follows: 1. Indirect material Variable cost per unit = Change in cost Ch . t t ange In ou pu Rs. 3,30,000 2,64,000 1,50,000-1,20,OOOunits = 66,000 30,000 = Rs. 2.20 Variable indirect material 1,20,000 x Rs. 2.20 = Rs. 2,64,000 for 1,20,000 units. Hence there is no fixed cost involved. Similar calculation for indirect labour and inspection. 2. Supervision = = . . Change in cos t Variable cost per Untt = Change in output Rs. 2,34,000 - 1,98,000 1,50,000-1,20,000 units = = 36,000 30,000 = Problem 11.9. ABC Ltd. shows the following profit/loss during the year 2002 Rs. 1.20 Fixed supervision cost 1,98,000 - (1,20,000 x 1.20) Rs. 54,000 Similar calculation for maintenance cost. 3. Depreciation and engineering services costs are the same at two levels of production. Thus these are fixed costs.

Float glass Manufacturing Company requires you to present the budget for the next year from the following information: Sales: Toughened Glass Bent Glass Direct material cost Direct wages Factory overheads: Works manager Foreman Stores and spares Depreciation on machinery Light and power Repairs and maintenance Other sundries Kshs 500 per month Kshs 400 per month 2.5% on sales Kshs 12,600 Kshs 3,000 Kshs 8,000 10% on direct wages 600,000 200,000 60% 0f sales 20 workers @ Kshs 150 per month

Administration, selling and distribution expenses Kshs. 36,000 per year). Prepare a master budget for the year. Solution Master Budget for the year ending.... Sales: Toughened Glass Bent Glass Total Sales Less: Cost of production : Direct materials (60% of Rs. 800,000) Direct wages (20 workers x Rs. 150 x 12) Prime Cost 516,000 480,000 36,000 600,000 200,000 800,000

Fixed Factory Overhead: Works manager's salary (500 x 12) Foreman's salary (400 x 12) Depreciation Light and power Variable Factory Overhead: Stores and spares Repairs and maintenance Sundry expenses Factory Cost Gross Profit (Sales - Less: Factory costs) 226,000 Less: selling and distribution expenses Net Profit 190,000 (36,000) 3,600 20,000 8,000 31,600 (574,000) 3,000 4,800 12,600 26,400 6,000

A company manufactures two products. A and B by making use of two types of materials viz. X and Y. Product A requires 10 units of X and 3 units of Y. Product B requires 5 units of X and 2 units of Y. The price of X is Kshs 2 per unit and that of Y Kshs. 3 per unit. The sales manager has estimated the sales of product A to be 5,000 units and that of product B 10,000 units. The estimated opening stock of material X for the budget period is 2,500 units and that of Y is 3,000 units. The desired closing stock of material X is 5,000 units and that of Y is 4,000 units. Prepare the Material Usage Budget and Materials Purchase Budget for the year ending 31st Dec. 2003. Solution Material Usage Budget for the year ending 31st Dec. 2003 Estimated sales Material X : @ 10 units per product A and 5 units per product B Material Y : @ 3 units per product A and 2 units per product B Product A (Units) 5,000 50,000 15,000 Product 8 (Units) 10,000 50,000 20,000 Total (Units) Total usage Cost of Materials X-@ Rs. 2 per unit for 1,00,000 units Y-@ Rs. 3 per unit for 35,000 units 1,00,000 35,000 Total cost of materials 65,000 70,000 Material Purchase Budget for the year ending 31st Dec. 2003 1,35,000 Rs. 2,00,000 1,05,000 Units required for production Add: Closing stock Material X 1,00,000 5,000 1,05,000 2,500 1,02,500 Rs.2 Rs. 2,05,000

3,05,000 Less : Opening stock Units to be purchased Cost per unit Cost of materials to be purchased Material Y 35,000 4,000 39,000 3,000 36,000 Rs.3 1,08,000

IIIstration 11.15. From the following particular, prepare a Production Budget of a Company for the month ended June 30, 2003. Product Solution A B C (as Sales (units) per sales budget) 1,50,000 1,00,000 70,000 Estimated stock (units) I June 2003 30 June 2003 14,000 15,000 5,000 14,500 8,000 8,000 (8. Com.) Production Budget for the month ending 30th June 2003 Sales as per Sales Budget Add: Estimated Stock on 30.6.2003 Less: Estimated Stock on 1.6.2003 Product A Units Product 8 Units Product C Units Budgeted Production 1,50,000 15,000 1,65,000 14,000 1,51,000 1,00,000 14,500 1,14,500 5,000 1,09,500 70,000 8,000 78,000 8,000 70,000

Problem 11.18. A company is expecting to have Rs. 25,000 cash in hand on 1st April 2003 and it requires you to prepare cash budget for the three months. April to June 2003. The following information is supplied to you. Expenses Rs. 6,000 7,000 7,000 8,000 9,00Q (b) (c) (d) Solution 25% of sale is for cash and the period of credit allowed to customers for credit sale is one month; Delay in payment of wages and expenses one month; Income tax Rs. 25,000 is to be paid in June 2003. (B. Com.. Madurai) Opening balance Receipts : Cash sales Debtors Cash Budget for three months ending June 2003 April Rs. 25,000 May Rs. 53,000 June Rs. 81,000 Total Rs. 25,000 Total Payments: Creditors Wages Expenses Income tax 23,000 60,000 83,000 25,000 69,000 94,000 30,000 75,000 1,05,000 78,000 2,04,000 2,82,000 Total Closing balance 40,000 8,000 7,000 55,000 February March April May June 53,000 50,000 9,000 7,000 66,000 81,000 52,000 10,000 8,000 25,000 95,000 91000 1,42,000 27,000 22,000 25,000 2,16,000 91,000