ICWAI Cost and Management Accounting previous years question papers

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Q. 1. (c) In the following cases one out of four answers is correct. You are required to indicate the correct
answer and give reasons for answer :
(i) If the minimum stock level and average stock level of raw material “A” are 4,000 and 9,000
units respectively, find out its reorder quantity.
A. 8,000 units
B. 11,000 units
C. 10,000 units
D. 9,000 units
(ii) A worker has a time rate of ` 15/hr. He makes 720 units of component (standard time : 5
minutes/ unit) in a week of 48 hours. His total wages including Rowan bonus for the week is
A. ` 792
B. ` 820
C. ` 840
D. ` 864
(iii) A company manufactures two products using common handling facility. The total budgeted
material handling cost is ` 60,000. The other details are :
Particulars Product X Product Y
Number of units produced 30 30
Material moves per product line 5 15
Direct labour hours per unit 200 200
Under Activity Based Costing System, the material handling costs to be allocated to Product X
(per unit) would be :
A. ` 1,000
B. ` 500
C. ` 1,500
D. ` 2,500
(iv) A company maintains a margin of safety of 25% on its current sales and earns a profit of ` 30
lakhs per annum. If the company has a profit volume (P/V) ratio of 40%, its current sales
amount to
A. ` 200 lakhs
B. ` 300 lakhs
C. ` 325 lakhs
D. None of the above
(v) Depreciation charged in costing books is ` 12,500 and in financial books is ` 11,200. What will
be the financial profit when costing profit is ` 5,000?
A. ` 5,000
B. ` 3,700
C. ` 6,300
D. None of the above
(vi) A bus carries 25 passengers daily for 25 days and its mileage per month is 2,000 kms. Its
passenger kms. are
A. 60,000
B. 25,000
C. 40,000
D. 50,000

(vii) Sale for two consecutive months, of a company are ` 3,80,000 and ` 4,20,000. The company’s
net profits for these months amounted to ` 24,000 and ` 40,000 respectively. There is no
change in contribution/sales ratio or fixed costs. The contribution/sales ratio of the company is
A. 1/3
B. 2/5
C. ¼
D. None of the above
(viii) A chemical is manufactured by combining two standard items of input A(standard price ` 60
/kg.) and B (Standard price ` 45/kg.) in the ratio 60 % : 40%. 10% of input is lost during
processing. If during a month 1,200 kg of the chemical is produced incurring a total cost of `
69,600, the total material cost variance will be
A. ` 2,400 (A)
B. ` 2,400 (F)
C. ` 3,000 (A)
D. ` 2,000 (F)
(ix) A Limited has fixed costs of ` 6,00,000 per annum. It manufactures a single product which it
sells for ` 200 per unit. Its contribution to sales ratio is 40%. A Limited’s break-even in units is
A. 7,500
B. 8,000
C. 3,000
D. 1,500
(x) The current liabilities of Akash Ltd. is ` 30,000. If its current ratio is 3:1 and Quick ratio is 1:1,
the value of stock-in-trade will be
A. ` 20,000
B. ` 30,000
C. ` 60,000
D. Insufficient information
Q. 1. (d) Fill in the blanks suitably :
(i) Under Taylor’s differential piece rate system, a worker whose production is higher than the
standard will get of normal piece rate.
(ii) The cost of abnormal waste should be excluded from the total cost and charged
to .
(iii) Under ABC System, the aggregate of closely related tasks is called .
(iv) In contract with escalation clause, the contractor can claim for increase in
prices of inputs to the agreed extent.
(v) arises when the actual process loss is less than the normal predetermined
process loss.
(vi) In accounting of joint products under market value method, joint costs will be apportioned to
the products in the ratio of of the respective individual products.
(vii) Costing reduce the possibility of under pricing.
(viii) Budgetary control becomes more effective in a business with the use of
costing.

(ix) No distinction is made between direct and indirect materials in costing.
(x) of overheads occur when absorbed overheads exceed actual overheads.
Answer 1. (a)
Column I Column II
Liquidity Current ratio
Value analysis Technique of cost reduction
Pareto distribution ABC analysis
Opportunity cost Value of benefit lost by choosing alternative course of action
Value engineering Analyzing the role of every part at the design stage
By-product cost accounting Reverse cost method
Brick making Single output costing
Merit rating Basis for remunerating employees
Angle of incidence Indicator of profit earning capacity
Stepped cost Supervisors’ salaries
Answer 1. (b)
(i) False – The cost of drawing, design and layout is an example of direct expense and not of production
cost.
(ii) False – Cost accounting is an internal reporting system for an organistaion.
(iii) False – Internal instruction to buy the specified quantity and description is called purchase
requisition note.
(iv) True – The statement is correct.
(v) False – The flux rate method of labour turnover considers employees joined and left.
(vi) False – An automobile service unit uses job costing.
(vii) False – Ash produced in thermal power plant is an example of by-product.
(viii) False – The absorption costing method conforms with the accounting standards.
(ix) True – Contribution = Sales – Variable cost.
(x) True – The statement is correct.
Answer 1. (c)
(i) C- 10,000 units
Average stock level = Minimum stock level + ½ Reorder quantity
9,000 units = 4,000 units + ½ Reorder quantity
½ Reorder quantity = 9,000 units – 4,000 units
Reorder level = 5, 000 units / 0.5 = 10,000 units
(ii) D – ` 864.
Standard time = hours 60
minutes 60
units 720 times 5


Time taken = 48 hrs.
Time saved = 12 hrs.

Total earning of a worker under Rowan plan
= (48 hrs. × ` 15) + ⎟

15 . Rs . hrs 48
. hrs 60
. hrs 12
= ` 720 + ` 144 = ` 864
(iii) B - ` 500
Total moves in material handling = 5 + 15 = 20
Percentage move for Product A = 5/20 = 25%
Material handling cost to be allocated to Product A
= ` 60,000 × 25/100 = ` 15,000
or, = ` 15,000/30 units = ` 500 p.u.
(iv) B - ` 300 lakhs
Margin of safety = Profit/ P/V Ratio
= 30/0.40 = ` 75 lakhs
0.25 of sales = ` 75 lakhs
Hence, Sales = 75/0.25 = ` 300 lakhs
(v) C – ` 6,300
Financial profit = ` 5,000 + ` (12,500 – 11,200)
= ` 5000 + ` 1,300 = ` 6,300
(vi) D- 50,000
Passengers carried in a day = 25
Kms. covered in a day = 2,000 kms. / 25 days
Bus passenger kms. per month = 25 days × 80 kms. per day × 25 passengers
= 50,000 passenger kms.
(vii) B-2/5
Contribution / sales = Increase in profit / Increase in sales
= (40,000 – 24,000) / (4,20,000 – 3,80,000)
= 16,000/40,000 = 2/5
(viii) B – ` 2,400 (F)
A – 60 kgs. @ ` 60/- = ` 3,600
B – 40 kgs. @ ` 45/- = ` 1,800
Process lost @ 10 % = 10 kgs.
Therefore, output = 90 kgs.
Therefore, standard cost of output = ` 5,400/ 90 kgs.
= ` 60/kg.
Material cost variance = ` 1,200 × 60 – ` 69,600
= ` 2,400 (F)
(ix) A – 7,500 units
Break-even units = Fixed cost / contribution per unit
= ` 6,00,000/ 40% of ` 200
= 7,500

(x) C- ` 60,000
Current Ratio =
s Liabilitie Current
Assets Current
= 3:1
Current Assets = ` 30,000 × 3 = ` 90,000
Quick Ratio =
s Liabilitie Quick
Assets Quick
= 1:1
Liquid assets = ` 30,000 × 1 = ` 30,000
Hence, value of stock-in-trade : CA – LA = ` (90,000 – 30,000)
= ` 60,000
Answer 1. (d)
(i) 120%.
(ii) Costing profit and loss account.
(iii) Activity.
(iv) Fixed price.
(v) Abnormal gain.
(vi) Sale price.
(vii) Absorption.
(viii) Standard.
(ix) Process.
(x) Overabsorption.

Q. 2. Write short notes on :
(i) Cost benefit analysis
(ii) Material transfer note
(iii) Cost plus contract
(iv) Role of costs in pricing
(v) Value analysis
Answer 2. (i)
In order to create more wealth by reducing costs, it is absolutely essential to be able to differentiate
between necessary and unnecessary costs. If you try to reduce the necessary costs, you almost certainly
reduce the benefits created by the resources being consumed. This kind of cost reduction leads to lower
than required quality, extended delivery periods, increased rejections from inadequate materials and so
on. The only really effective way of increasing the wealth created by the company is to search out and
eliminate all unnecessary costs.
There are five steps involved in establishing the benefits created by resources consumed in the business.
Step 1 – Cost Analysis
This involves an analysis of all costs and activities. This can usually be done from any reasonably
designed accounting system.

Step 2 – Contribution Analysis
Analyzing the value of what each activity contributes in terms of income or benefits is important in
establishing the real wealth-creating activities of the business.
Step-3 – Benefit Analysis
Trying to decide on the benefits provided by the service and control activities is no easy matter. It is very
much an attitude of mind, based on asking questions. It is vital to break down costs on the basis of the
reasons why they are incurred, and then to assess the benefits.
Step 4 – Cost Reduction
Develop a cost-reduction programme by establishing those reasons for incurring cost which :
(a) Do not contribute to an activity’s earning potential
(b) Do not contribute adequately to the activity’s earning potential.
(c) Do not create benefits.
(d) Do not create adequate benefits for the level of cost.
Step 5 – Profit Improvement
Develop a profit improvement programme by determining those areas which can create additional income
from existing and new resources, based on rationalization and reduced costs of existing activities.
Answer 2. (ii)
When excess material remains in one department, and another neighboring department need the same, it
becomes easier and economical to transfer the material rather than receiving back in stores, and again
issue them. Transfers are made for the document known as a Material Transfer Note (MTN). This document
is used to record the transfer of materials from one department, job, stores, cost centre, or cost unit to
another.
Valuation of Material Transfer Note (MTN) is done at the original price of issue but if this is not practicable,
the current stores ledger rate is adopted for valuation as in the case of Material Return Notes. However,
the MTN should be prepared correctly to avoid incorrect accounting. It is preferable to use pre-numbered
forms for better control.
Circulation of Material Transfer Note :
(a) Receiving department
(b) Cost department
(c) Stores
(d) Issuing department.
Answer 2. (iii)
CIMA defines Cost plus Contract as one where the contractor is reimbursed allowable or otherwise
defined cost plus a percentage of these costs or a fixed fee towards profit. The customer has a right to
verify the actual costs as these forms the basis for calculation of profit. Cost plus contracts are usually
entered into during times of emergency such as war when there is no time to go through detailed tender
formalities for settlement of a contract. It is also resorted when it is not possible to estimate the cost of
the work with any degree of accuracy especially when prices are subject to wide fluctuations.
The advantage to the contractor in such contracts is that he is protected from fluctuations in prices of
material, labour and services and he is assured of his profit as per the terms of the agreement. Moreover

he need not go through tender formalities and he can even take up works which cannot be exploited by the
contractor. To the contractee or customer the execution of work at a reasonable cost is assured. Thus the
contractor and the customer are both benefited by this agreement.
The disadvantage of such contracts is that the contractor has no motivation to effect cost savings, as it
will indirectly bring down his profit also. The customer has no clear idea of his liability until after
completion of the entire work. Unless the contract agreement provides clearly for definition of cost
elements allowable wastage, if any, mode of charging depreciation on assets, settlement of disputes etc.
Cost plus contracts may lead to dissatisfaction for both the contractor and the customer.
Answer 2. (iv)
Cost data constitute the fundamental element in the price setting process. Higher costs including
promotional expenses involved in connection with advertising or personal selling as well as taxation
may necessitate an upward adjustment of price. If costs go up, price rise can be quite justified. However,
their relevance to the pricing decision must neither be under –estimated nor exaggerated. No company
should charge prices below full costs unless such a policy appears necessary or expedient in the short
period. Costs are just one of the several factors to be considered in a pricing decision and for pricing
purposes, costs are best regarded as floor below which a company will not normally price its products.
Costs determine the profit consequences of the various pricing alternatives. Cost calculations may also
help in determining whether the product whose price is determined by its demand is to be included in the
product line or not.
Though in the long run, all costs have to be covered for managerial decisions. In the short run direct costs
are more relevant. In a single product firm, all costs are direct costs with respect to the product. In multi
product firm, for pricing decisions, relevant costs are those costs that are directly traceable to an individual
product. In addition, it must contribute to the common costs and to the realization of profit.
Answer 2. (v)
A value analysis is a systematic analysis and evaluation of the techniques and functions in the various
spheres of an organization with a view to exploring channels of performance improvement, so that value
in a particular product or service can be bettered. It enables the maximum possible value to be achieved
for given cost.
The concept of value analysis calls for a complete rethinking on all aspects of an industrial and commercial
activity. This concept goes beyond perfecting an existing pattern. Existing practices of materials used,
process employed, machines used, types of operations, types of packaging, marketing methods etc. are
reviewed, alternative approaches for product mix, labour operations, machinery and methods available
are considered. This helps to achieve the better economics of production, sales and distribution through
modification of incorporation in/elimination of some of the factors and items.
Value analysis is a team effort – a team representing design, production control, purchasing, distribution
etc. staff.
Steps in the value analysis are –
(a) Identification of problem and definition of problem.
(b) Collection of information.
(c) Exploring and evaluation of alternatives.
(d) Development and planning.
(e) Recommendation of the final proposal for implementation.
It is an important tool for cost reduction.

Basic Aspects of Cost Accounting :
Q. 3. (a) Explain ‘Cost centre’ and ‘Cost unit’.
(b) A company manufactures a product from a raw material, which is purchased at ` 54 per kg. The
company incurs a handling cost of ` 350 plus freight of ` 400 per order. The incremental carrying
cost of inventory of raw material is Re. 0.50 per kg per month. In addition, the cost of working
capital finance on the investment in inventory of raw material is `8 per kg per annum. The annual
production of the product is 94,500 units and 2 units are obtained from one kg of raw material.
Required :
(i) Calculate the economic order quantity of raw materials.
(ii) Advise, how frequently should orders for procurement be placed.
(iii) If the company proposes to rationalize placement of orders on quarterly basis, what
percentage of discount in the price of raw materials should be negotiated ?
(c) A large consignment of materials of various types of makes was purchased for ` 40,000. Later on
these were sorted into the following categories :
Category A 6,000 units Market price ` 4 per unit
Category B 4,000 units Market price ` 3 per unit
Category C 7,000 units Market price ` 2 per unit
You are required to calculate the purchase price for each of the materials presuming that
percentage of profit in each case is the same.
Answer 3. (a)
CIMA defines Cost Centre as “a production or service, function, activity or item of equipment whose costs
may be attributed to cost units. A cost centre is the smallest organisational sub-unit for which separate
cost allocation is attempted”. A cost centre is an individual activity or group of similar activities for
which costs are accumulated. For example in production departments, a machine or group of machines
within a department or a work group is considered as cost centre. Any part of an enterprise to which costs
can be charged is called as ‘cost centre’.
A cost centre can be :
(i) Geographical i.e. an area such as production department, stores, sales area.
(ii) An item of equipment e.g. a lathe, forklift, truck or delivery vehicle.
(iii) A person e.g. a sales person.
CIMA defines Cost Unit as “a quantitative unit of product or service in relation to which costs are
ascertained”. A ‘cost unit’ is a unit of product or unit of service to which costs are ascertained by means
of allocation, apportionment and absorption. It is a unit of quantity of product, service or time or a
combination of these in relation to which costs are expressed or ascertained. For example, specific job,

contract, unit of product like fabrication job, road construction contract, an automobile truck, a table,
1000 bricks etc. The cost units which pass through the cost centre, the direct and indirect costs of the cost
centre are charged to the units of production by means of an absorption rate. The unit of output in relation
to which cost incurred by a cost centre is expressed is called ‘cost unit’. Cost units can be developed for all
kinds of organizations, whether manufacturing, commercial or public utility services.
Answer 3. (b)
(i) EOQ =
CS
AB 2
A = Annual consumption = . kg 1
units 2
units 500 , 94
= 47,250 kgs.
B = Cost of placing order = Handling cost + Freight
= ` 350 + ` 400 = ` 750
CS = Carrying cost per unit
Carrying cost (Re. 0.50 × 12) = 6
Finance charges on investment in inventory = 8
14
EOQ =
14
750 250 , 47 2 = 2,250 kgs.
(ii) Frequency of orders = 47,250 kgs./ 2,250 kgs. = 21 orders
Frequency in placing orders = 365 days / 21 orders = 17 days
(iii) If company places orders on quarterly basis, percentage of discount in price of raw material
to be negotiated :
Cost under EOQ : `
Ordering cost 21 orders × ` 750 15,750
Carrying cost 2,250 kgs. × ½ × ` 14 15,750
Total cost 31,500
Cost under Ordering on Quarterly Basis :
Ordering cost 4 orders × ` 750 3,000.00
Carrying cost 11,812.50 kgs. × ½ × ` 14 82,687.50
Total cost 85,687.50
Incremental cost if orders are placed on quarterly basis = 85,687.50 – 31,500.00
= ` 54,187.50
Reduction in purchase price to be negotiated = ` 54,187.50/47,250 kgs.
= ` 1.15 per kg.
Percentage of discount to be negotiated = 100
54
15 . 1

`
`
= 2.13%

Answer 3. (c)
Presuming that all units were sold away, the percentage of profit will be as follows :
Category A 6,000 units x ` 4 24,000
Category B 4,000 units x ` 3 12,000
Category C 7,000 units x ` 2 14,000
Total sales 50,000
Total Cost ` 40,000
Profit ` 10,000
Percentage of profit on sales =
000 , 50
100 000 , 10 
= 20%
Computation of the purchase price :
Material S.P. per unit Profit per unit Cost per unit Total Cost
A ` 4 ` 0.80 ` 3.20 ` 19,200
B 3 0.60 2.40 9,600
C 2 0.40 1.60 11,200
40,000
Q. 4. (a) State the circumstances in which time rate system of wage payment can be preferred in a factory.
What are the advantages of this system?
(b) Components for an assembly are produced under the control of the production manager. These
are assembled and sold under the supervision of the sales manager. The production manager is
entitled for a bonus payment for himself at 1/8th and the workers 7/8th of the difference between
the notional value and cost of production of the delivered components. The notional value is
assessed at ` 5,18,500 for the components issued to assembly. The sales manager is entitled to
a bonus of 2-1/2% of the profits for himself and 12-1/2% is distributed among his sales staff. The
sales during a period amount to ` 65,000.
From the under mentioned particulars, detail the calculations involved in arriving at the bonus
for both managers and the staff. Find also the impact of such bonus as a percentage of sales.
`
Raw materials at the beginning of the period 22,800
Raw materials at the end of the period 16,400
Purchases during the period 2,48,600
Wages – Production 46,200
Wages – Assembly 18,100
Overheads – Production 2,12,500
Overheads – Sales 45,200
Credit for scrap realized pertaining to components 8,700
Work-in-progress of production at the beginning 12,500
Work-in-progress of production at the end 18,200
Completed assemblies at the beginning 36,000
Completed assemblies at the end 24,030
Net realization on assemblies sold 6,50,000

Answer 4. (a)
In time based wage payment plans, standard time is predetermined and the efficiency of each individual
worker is assessed to compensate them for higher efficiency in work as compared to standard time set.
These plans can be suitably applied in the following circumstances :
(i) Where the output of an individual worker cannot be measured reasonably.
(ii) Where the work is required to be closely supervised.
(iii) Where the quality of work is more important.
(iv) Where output of an individual worker is not in his control.
(v) Where increase in output is negligible compares to the incentive.
The advantages of time rate remuneration plans are as follows :
(i) It is commonly recognized by all trade unions as well as worker
(ii) It is a guaranteed income assured to the worker
(iii) It is very easy to understand and simple to calculate the earnings of worker
(iv) It involves less clerical work and detailed records are not necessary.
(v) Since the production is not the criteria for calculation of wages, tools and materials are handled
carefully. Wastage is also minimized.
Answer 4. (b)
Cost of Production of the Components : `
Work-in-progress (opening) 12,500
Raw materials consumed (Opening stock + Purchases – Closing stock) 2,55,000
Wages – Production 46,200
Overhead – Production 2,12,500
Total 5,26,200
Less : Credit for scrap realized 8,700
5,17,500
Less : Work-in-progress (closing) 18,200
Cost of production excluding bonus (a) 4,99,300
Notional value 5,18,500
Difference between notional value and cost of production 19,200
Bonus of Production Manager (19,200 x 1/8) 2,400
Bonus to workers (19,200 x 7/8) 16,800
Total bonus (b) 19,200
Cost of the components delivered (a + b) 5,18,500

Cost of sales of the Components :
Cost of the components delivered 5,18,500
Wages – Assembly 18,100
Overheads – Sales 45,200
Completed assembly (opening) 36,000
Total 6,17,800
Less : Completed assembly (closing) 24,030
Cost of sales excluding bonus (a) 5,93,770
Selling price 6,50,000
Profit (before bonus) 56,230
Bonus to sales manager (56,230 x 2.5/100) 1,406
Bonus to sales staff (56,230 x 12.5/100) 7,029
Total bonus (sales) (b) 8,435
Cost of sales including bonus (a + b) 6,02,205
Profit (net) 47,795
Selling price 6,50,000
Impact of Bonus on Sales :
Bonus – Production 19,200
Bonus – Sales 8,435
Total bonus 27,635
Bonus as a % of sales 100
000 , 50 , 6
635 , 27

4.25%
Q. 5. (a) How do you deal with the following in Cost Accounts?
i. Fringe benefits
ii. Data processing cost.
(b) The cost sheet of a company based on a budget volume of sales of 4,00,000 units per quarter is as
under :
(` Per unit)
Direct materials 6.00
Direct wages 3.00
Factory overheads (50% fixed) 8.00
S/ Adm. Overheads (1/3 variable) 4.50
Selling price 24.00
When the budget was discussed it was felt that the company would be able to achieve only a
volume of 3,00,000 units of production and sales per quarter. The company therefore decided
that an aggressive sales promotion campaign should be launched to achieve the following improved
operations :
Proposal I :
- Sell 5,00,000 units per quarter by spending ` 2,50,000 on advertising.
- The factory fixed costs will increase by ` 4,00,000 per quarter.

Proposal II :
Sell 6,00,000 units per quarter subject to the following conditions :
- An overall price reduction of ` 2 per unit is allowed on all sales.
- Variable selling and administration costs will increase by 6%.
- Direct material costs will be reduced by 1.5% due to purchase price discounts.
- The fixed factory costs will increase by ` 2,50,000 more.
You are required to prepare a Flexible Budget at 3,00,000, 5,00,000 and 6,00,000 units of output
per quarter and calculate the profit at each of the above levels of output.
Answer 5. (a)
The treatment will be as follows :
(i) Fringe benefits : The employees are paid additional benefits like leave with pay, contributions to
the schemes like provident fund, E.S.I., medical reimbursement, subsidized canteen facility, leave
travel concession, group insurance, etc. These benefits are called ’fringe benefits’. If these benefits
are provided for the factory personnel, they are treated as Production Overhead and are apportioned
to all cost centres, including both production and service cost centres on the basis of number of
employees in each centre. The fringe benefits provided to the office staff, sales staff and distribution
staff should be treated as Administration, Selling and Distribution Overheads respectively.
(ii) In the environment of processing information with the help of computers, the data processing cost
represents the cost incurred for processing data relating to accounts, secretarial, personnel, finance,
marketing, sales etc. This may be done either utilizing in house facilities or hiring outside facilities.
The costs incurred is accumulated for separate service centre if in-house facilities are made
available. Where the costs of data processing centre or hiring charges are identifiable to a particular
department or activity it should be charged with its portion of cost. In case of common costs
incurred for service of all departments, the data processing cost should be apportioned to different
departments on equitable basis.

Answer 5. (b)
Flexible budget for the quarter ended… `
Units produced and sold 3,00,000 5,00,000 6,00,000
Sales revenue
(3,00,000 × ` 24); (5,00,000 × ` 24); (6,00,000 × ` 22) (a) 72,00,000 1,20,00,000 1,32,00,000
Variable costs :
Direct materials
(3,00,000 × ` 6); (5,00,000 × ` 6); (6,00,000 × 5.91) 18,00,000 30,00,000 35,46,000
Direct labour (@ ` 3 per unit) 9,00,000 15,00,000 18,00,000
Factory overheads (@ ` 4 per unit) 12,00,000 20,00,000 24,00,000
Selling and Administration overheads
(3,00,000 × ` 1.5); (5,00,000 × `1.5); (6,00,000 × ` 1.59) 4,50,000 7,50,0000 9,54,000
Total variable costs (b) 43,50,000 72,50,000 87,00,000
Contribution (c) = (a) – (b) 28,50,000 47,50,000 45,00,000
Fixed costs :
Factory overhead 16,00,000 16,00,000 16,00,000
Selling and administration overheads 12,00,000 12,00,000 12,00,000
Increase in fixed factory costs - 4,00,000 6,50,000
Advertisement costs - 2,50,000 -
Total fixed costs (d) 28,00,000 34,50,000 34,50,000
Profit (c) – (d) 50,000 13,00,000 10,50,000

Q. 6. (a) What are the implications of Economic Order Quantity in proper inventory management?
(b) Development Company Ltd. manufacture three products A,B and C and sells them direct through
own sales force in three zones X, Y and Z. The overall control of distribution and sales is taken care
of by the Headquarters, responsible also for sales promotion.
You are presented with the following data for the year ended 31st March 2010.
`
Sales Direct Selling and
Distribution Expenses
Zone X : Product A 3,00,000 20,400
B 2,00,000 21,000
C 1,00,000 10,600
6,00,000 52,000
Zone Y : Product A 4,00,000 28,400
B 4,00,000 37,600
C 2,00,000 21,000
10,00,000 87,000
Zone Z : Product A 1,00,000 8,400
B 80,000 6,800
C 2,20,000 28,800
4,00,000 44,000
Selling and Sales promotion expenses at the Headquarter are as follows :
Selling expenses ` 36,000
Advertisement expenses ` 40,000
Other expenses ` 48,000
While advertisement expenses are allocated to zones and products on the basis of sales, the
other two types of expenses are allocated equally to zones and products.
Cost of sales should be taken as following percentage of sales :
Product A 80%
B 75%
C 70%
You are required to tabulate the above information to present comparative profit and loss
statements for each zone and for each product.
Answer 6. (a)
The prime objective of inventory management is to find out and maintain optimum level of investment in
inventory to minimize the total costs associated with it. Economic Order Quantity is the size of the order
for which both ordering and carrying cost are minimum. Economic Order Quantity forms the very basis of
inventory management. It refers to the size of each purchase order quantity for each item, which gives the
maximum economy in purchase of that raw material or finished goods or stores materials. While placing
any order for purchase of any item, it must be ensured that the order quantity is neither too large nor too
small. A large order, no doubt, shall also mean the lower ordering cost but it shall mean a higher and
sometimes prohibitive carrying costs. On the other hand, a small order may reduce the inventory carrying
cost but the ordering costs would increase as the company may have to place a new order every now and

then, besides, it may result in occasional production halts also. Therefore, a proper balance has to be
struck between these two factors and the Economic Order Quantity shall be fixed at a point, where the
aggregate cost of the two is minimum i.e., the total cost associated with the inventory management is
minimum.
Answer 6. (b)
Statement showing Profit and Loss for each Zone for the year ended 31st March 2010 :
`
Particulars Zone X Zone Y Zone Z Total
Sales 6,00,000 10,00,000 4,00,000 20,00,000
Cost of sales :
Product A (3:4:1) 2,40,000 3,20,000 80,000 6,40,000
Product B (5:10:2) 1,50,000 3,00,000 60,000 5,10,000
Product C (5:10:11) 70,000 1,40,000 1,54,000 3,64,000
Total 4,60,000 7,60,000 2,94,000 15,14,000
Gross margin 1,40,000 2,40,000 1,06,000 4,86,000
Less : Selling & Distribution Expenses
Direct 52,000 87,000 44,000 1,83,000
Indirect :
Advertisement 12,000 20,000 8,000 40,000
Selling 12,000 12,000 12,000 36,000
Others 16,000 16,000 16,000 48,000
Net profit 48,000 1,05,000 26,000 1,79,000
Note : Normally cost of sales includes cost of goods sold and non-production overheads like administration
and selling and distribution. But here it is presumed that cost of sales does not include selling and
distribution expenses.
Statement showing Profit and Loss for each Product for the year ended 31st March 2010 :
`
Particulars Product A Product B Product C Total
Sales :
Zone X 3,00,000 2,00,000 1,00,000 6,00,000
Zone Y 4,00,000 4,00,000 2,00,000 10,00,000
Zone Z 1,00,000 80,000 2,20,000 4,00,000
8,00,000 6,80,000 5,20,000 20,00,000
Less : Cost of Sales 6,40,000 5,10,000 3,64,000 15,14,000
(Product A-80%, B-75%, C-70% of sales)
Gross margin 1,60,000 1,70,000 1,56,000 4,86,000
Less : Selling & Distribution Expenses
Direct 57,200 65,400 60,400 1,83,000
Indirect :Advertisement 16,000 13,600 10,400 40,000
Selling 12,000 12,000 12,000 36,000
Others 16,000 16,000 16,000 48,000
Profit 58,800 63,000 57,200 1,79,000

Q. 7. (a) What is an idle capacity? What are the costs associated with it? How are these treated in product
costs?
(b) Sunshine Ltd. buy and sell finished goods after carrying out some operations. They began the year
with 3,000 units valued at ` 3 per unit. During the year they sold 25,000 units for an average sale
price of ` 10 per unit. Purchases were as follows :
4,000 units @ ` 5 per unit
16,000 units @ ` 6 per unit
6,000 units @ ` 7 per unit
The current replacement cost of the unit is ` 8 and the Company’s Taxation Manager advises that
there may be significant tax advantages of purchasing at year-end at this price, as the company
uses the LIFO method and has got the acceptance of the tax authorities for consistently using this
method in its assessments. The corporate tax averages 30%.
Bearing in mind that the warehouse space is limited to 10,000 units, work out the tax advantages
and the cost of year-end purchasing under this situation given that the operating expenses for
the year are ` 37,000.
Answer 7. (a)
Idle Capacity : Idle capacity is that part of the capacity of a plant, machine or equipment which cannot be
effectively utilised in production. In other words, it is the difference between the practical or normal
capacity and capacity of utilisation based on expected sales. For example, if the practical capacity of
production of a machine is to the tune of 10,000 units in a month, but is used only to produce 8,000 units,
because of market demand of the product, then in such a case, 2,000 units will be treated as the idle
capacity of the machine.
The idle capacity may arise due to lack of product demand, non-availability of raw-material, shortage of
skilled labour, absenteeism, shortage of power, fuel or supplies, seasonal nature of product, etc.
Idle Capacity Costs: Costs associated with idle capacity are mostly fixed in nature. These include
depreciation, repairs and maintenance charges, insurance premium, rent, rates, management and
supervisory costs. These costs remain unabsorbed or unrecovered due to under-utilisation of plant and
service capacity. Idle capacity cost can be calculated as follows :
Idle capacity cost = Capacity Idle
capacity plant Normal
plant to related overhead ggregate A

Treatment of Idle capacity cost: Idle capacity costs can be treated in product costing, in the following
ways :
(i) If the idle capacity cost is due to unavoidable reasons such as repairs, maintenance, change over
of job, etc, a supplementary overhead rate may be used to recover the idle capacity cost. In this
case, the costs are charged to the production capacity utilised.
(ii) If the idle capacity cost is due to avoidable reasons such as faulty planning, power failure etc., the
cost should be charged to profit and loss account.
(iii) If the idle capacity cost is due to seasonal factors, then, the cost should be charged to the cost of
production by inflating overhead rates.
Answer 7. (b)
Statement showing closing stock at the year end
Total purchases during the year 26,000 units
Opening stock 3,000
29,000
Less : Units sold during the year 25,000
Total closing stock 4,000

Storage capacity is 10,000 units, year-end purchases can be up to 6,000.
Profit statement without making year-end purchases
(LIFO Method) `
Sales (25,000 x 10) ` 2,50,000
Less : Cost of goods sold
6,000 x 7 = ` 42,000
16,000 x 6 = ` 96,000
3,000 x 5 = ` 15,000 1,53,000
Gross profit 97,000
Less : Operating expenses (given) 37,000
Taxable income 60,000
Less : Income Tax @ 30% 18,000
Profit after tax 42,000
Profit statement after year-end purchases of 6,000 units at current replacement cost
`
Sales (25,000 × 10) 2,50,000
Less : Cost of goods
6,000 × 8 = 48,000
6,000 × 7 = 42,000
13,000 × 6 = 78,000 1,68000
Gross profit 82,000
Less : Operating expenses 37,000
Taxable income 45,000
Less : income tax @ 30% 13,500
Profit after tax 31,500
Tax advantage : By accepting the advice of Taxation Manager of Sunshine Ltd. will be able to effect a tax
saving of ` 4,500 i.e. ` 18,000 – ` 13,500 = ` 4,500.
`
Cost of year-end purchases : 6,000 units @ ` 8 = 48,000
Less : Tax advantage 4,500
Effective cost of closing inventory 43,500
Effective cost per unit of year-end purchase ` 43,500 ÷ 6,000 = ` 7.25.
Cost accounting methods and systems :
Q. 8. A company within the chemical industry mixes powdered ingredients in two different processes to
produce one product. The output of Process I becomes the input of Process 2 and the output of
Process 2 is transferred to the packing department.
From the information given below, you are required to open accounts for Process 1, Process 2,
abnormal loss and packing department and to record the transactions for the week ended 11th June,
2010.

Process 1
Input :
Material A 6,000 kilograms at ` 1 per kilogram
Material B 4,000 kilograms at ` 2 per kilogram
Mixing Labour 430 hours at `4 per hour
Normal Loss 5% of weight input, disposed off at 32 paise per kilogram
Output 9,200 kilograms.
No work in process at the beginning or end of the week.
Process 2
Input :
Material C 6,600 kilograms at ` 2.50 per kilogram
Material D 4,200 kilograms at Re. 1.50 per kilogram
Flavouring Essence ` 600
Mixing Labour 370 hours at ` 4 per hour
Normal Waste 5% of weight input with no disposal value
Output 18,000 kilograms.
No work in process at the beginning of the week but 1,000 kilograms in process at the end of the
week and estimated to be only 50% complete so far as labour and overhead were concerned.
Overhead of ` 6,400 incurred by the two processes to be absorbed on the basis of mixing labour
hours.
Answer 8.
Process 1 Account
Dr. Cr.
Kg. Per kg. Kg. Per kg.
` ` ` `
To Material A 6,000 1.00 6,000 By Normal Loss 500 0.32 160
To Material B 4,000 2.00 8,000 By Abnormal 300 2.00 600
Loss (See Note 2)
To Mixing Labour 1,720 To Transfer to 9,200 2.00 18,400
(430 hours @ `4.00 Process 2
per hour)
To Overhead 3,440
10,000 19,160 10,000 19,160

Process 2 Account
Dr. Cr.
Kg. Per kg. Kg. Per kg.
` ` ` `
To Process 1 9,200 2.00 18,400 By Normal Waste 1,000 —
To Material C 6,600 2.50 16,500 By Work 1,000 2,320
To Material D 4,200 1.50 6,300 in-process
To Flavouring Essence 600 (See Note 3)
To Mixing Labour 1480 By Packing Deptt. 18,000 2.44 43,920
(370 hours
@ 4.00 per hour)
To Overhead 2,960
(See Note 1)
20,000 46,240 20,000 46,240
Abnormal Loss Account
Dr. Cr.
Kg. Per kg. Kg. Per kg.
` ` ` `
To Process 1 A/c 300 2.00 600 By Sale A/c 300 0.32 96
By Balance to P/L A/c 504
300 600 300 600
Packing Department Account
Dr. Cr.
Kg. Per kg. Kg. Per kg.
` ` ` `
To Process 2 A/c 18,000 2.44 43,920 By Balance c/d 18,000 2.44 43,920
18,000 43,920 18,000 43,920
Notes :
1. Total overhead expenses : ` 6,400
Total labour hours in Process 1 and 2 = 800
Overhead absorption rate = ` 6,400/800 hours = ` 8 per labour hour
Overhead under Process 1 = 430 × ` 8 = ` 3,440
Overhead under Process 2 = 370 × ` 8 = ` 2,960
2. Cost of 9,500 Kg. of output is = ( `19,160 – ` 160) i.e., ` 19,000
Hence cost per kg. of output is Re. 2.00

3. Equivalent Units Statement of Output
Output Units Equivalent Units
Material Labour Overhead
Completed 18,000 18,000 18,000 18,000
WIP (100% Material, 50% 1,000 1,000 500 500
Labour and Overhead)
Normal Waste 1,000
20,000 19,000 18,500 18,500
Cost Statement for the week ending 11th June 2010
`
Material (Process 1) 18,400
Material C 16,500
Material D 6,300
Flavouring Essence 600
Total Material Cost 41,800
Total Mixing Labour Cost 1,480
Total Overhead Cost 2,960
Cost per Equivalent Unit
Material = ` 41,800 / 19,000 = ` 2.20
Labour = ` 1,480 / 18,500 = 0.08 P
Overhead = ` 2,960 / 18,500 = 0.16 P
W.I.P.
Material = 1,000 × ` 2.20 = ` 2,200
Labour = 500 × 0.08 P = ` 40
Overhead = 500 × 0.16 P = ` 80
= ` 2,320

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Contact Details:
The Institute Of Cost Accountants Of India
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Vikas Khand,
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Lucknow,
Uttar Pradesh 226010
India

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