Cost and Management AccountingQuestion 5480 of 251
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Question 1 (a) Language Achievers, a renowned institute specializing in TOEFL preparation, has secured a spacious hall for 20,000 on weekly basis with a seating capacity of 250 students. The instructor, highly qualified and experienced, is compensated generously with an honorarium of 1,500 per lecture. Additionally, he receives reimbursement for travel expenses of ` 200 per day along with refreshments costing 1,500 per week to ensure his comfort and focus during teaching sessions. Administrative and miscellaneous expenses, covering essential utilities and materials are, 500 per week. Language Achievers has meticulously planned its curriculum, scheduling batches of 2 lectures per day, 5 days a week for 30 weeks, ensuring comprehensive coverage of the TOEFL syllabus. Required: (i) Calculate the total cost per batch. (ii) Determine the minimum fee per student in a batch to cover costs, if the batch is fully occupied. (iii) Calculate the fee to be charged from. each student if batch is 80% filled and institute aims to achieve a profit margin of 25% on the fee. (5 Marks) COST AND MANAGEMENT ACCOUNTING (b) XYZ Ltd. declared a net profit of ` 2,25,000 based on their financial accounts for the year ending 31st March, 2024. The profit disclosed in cost books are not matched with financial accounts. The following information were revealed during the scrutiny of the figures of both the sets of books: Sr. No. Particulars ` 1. Preliminary expenses written off in financial accounts 35,000 2. Factory Overheads Over charged in cost accounts 20,000 3. Expenses on issue of shares in financial accounts 30,000 4. Undervaluation of closing stock in cost accounts 65,000 5. Interest on Bank Deposits in financial accounts 60,000 6. Under recovery of administration overheads in cost accounts 25,000 7. Notional Rent of own premises charged in cost accounts 30,000 8. Under recovery of selling overheads in cost accounts 35,000 9. Bad debts recovered in financial accounts 50,000 Required: Prepare Reconciliation Statement to arrive at net profit/loss as per Cost Accounts. (5 Marks) (c) JC Ltd. has a production capacity of 80,000 units per year. Presently a company produces 60,000 units. Its cost structure is as under: Material Cost ` 6 per unit Labour Cost ` 4 per unit Variable overheads ` 2 per unit Total fixed cost ` 3,00,000 per annum. Present selling price ` 20 per unit in the month of January, 2024 company received an offer from a Japanese client to supply 20,000 units at a price of ` 14 per unit with the additional shipping cost of ` 8,000. Required: (i) On the basis of changes in the profit, advice to the company, whether the offer should be accepted or not? (ii) Will your advice be different, if the customer is local one? (iii) If Japanese client offer for supply of 30,000 units to a price of ` 14 (part supply of order not accepted) and shipping cost treated as variable cost, analyze the impact on the profit of JC Ltd., if order accepted. (4 Marks)

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Detailed Solution & Explanation

### (a) (i) Calculation of Total Cost per Batch The course runs for 30 weeks. The total cost is computed as follows: - **Hall Charges**: Hall Charges=₹ 20,000×30 weeks=₹ 6,00,000\text{Hall Charges} = \text{₹ } 20,000 \times 30 \text{ weeks} = \text{₹ } 6,00,000 - **Honorarium of Instructor**: Number of lectures=2 lectures/day×5 days/week×30 weeks=300 lectures\text{Number of lectures} = 2 \text{ lectures/day} \times 5 \text{ days/week} \times 30 \text{ weeks} = 300 \text{ lectures} Honorarium=300×₹ 1,500=₹ 4,50,000\text{Honorarium} = 300 \times \text{₹ } 1,500 = \text{₹ } 4,50,000 - **Reimbursement of Travel Expenses**: Number of working days=5 days/week×30 weeks=150 days\text{Number of working days} = 5 \text{ days/week} \times 30 \text{ weeks} = 150 \text{ days} Travel Expenses=150×₹ 200=₹ 30,000\text{Travel Expenses} = 150 \times \text{₹ } 200 = \text{₹ } 30,000 - **Refreshments**: Refreshments=30 weeks×₹ 1,500=₹ 45,000\text{Refreshments} = 30 \text{ weeks} \times \text{₹ } 1,500 = \text{₹ } 45,000 - **Administrative & Miscellaneous Expenses**: Admin Expenses=30 weeks×₹ 500=₹ 15,000\text{Admin Expenses} = 30 \text{ weeks} \times \text{₹ } 500 = \text{₹ } 15,000 | Particulars | Computation | Amount (₹) | | :--- | :--- | :---: | | Hall Charges | ₹ 20,000×30\displaystyle 20,000 \times 30 | 6,00,000\displaystyle 6,00,000 | | Honorarium of Instructor | ₹ 1,500×2×5×30\displaystyle 1,500 \times 2 \times 5 \times 30 | 4,50,000\displaystyle 4,50,000 | | Travel Reimbursement | ₹ 200×5×30\displaystyle 200 \times 5 \times 30 | 30,000\displaystyle 30,000 | | Refreshments | ₹ 1,500×30\displaystyle 1,500 \times 30 | 45,000\displaystyle 45,000 | | Administrative & Miscellaneous Expenses | ₹ 500×30\displaystyle 500 \times 30 | 15,000\displaystyle 15,000 | | **Total Cost per Batch** | | **11,40,000\displaystyle 11,40,000** | ### (a) (ii) Minimum Fee per Student (Fully Occupied - 250 Students) Minimum Fee=Total Cost per BatchSeating Capacity=₹ 11,40,000250=₹ 4,560\text{Minimum Fee} = \frac{\text{Total Cost per Batch}}{\text{Seating Capacity}} = \frac{\text{₹ } 11,40,000}{250} = \text{₹ } 4,560 ### (a) (iii) Fee per Student (80% Filled, 25% Profit Margin on Fee) - **Number of Students**: Number of Students=250×80%=200 students\text{Number of Students} = 250 \times 80\% = 200 \text{ students} - **Required Total Revenue (Fee Recovery)**: Let R\displaystyle R be the total revenue. The profit is 25%\displaystyle 25\% of the revenue R\displaystyle R, so the cost is 75%\displaystyle 75\% of the revenue R\displaystyle R. ₹ 11,40,000=0.75×R  ⟹  R=₹ 11,40,0000.75=₹ 15,20,000\text{₹ } 11,40,000 = 0.75 \times R \implies R = \frac{\text{₹ } 11,40,000}{0.75} = \text{₹ } 15,20,000 - **Fee per Student**: Fee per Student=RNumber of Students=₹ 15,20,000200=₹ 7,600\text{Fee per Student} = \frac{R}{\text{Number of Students}} = \frac{\text{₹ } 15,20,000}{200} = \text{₹ } 7,600 --- ### (b) Reconciliation Statement Reconciliation statement to arrive at Net Profit as per Cost Accounts starting from Net Profit as per Financial Accounts: | Particulars | Amount (₹) | Amount (₹) | | :--- | :---: | :---: | | **Net Profit as per Financial Accounts** | | **2,25,000\displaystyle 2,25,000** | | **Add:** | | | | - Preliminary expenses written off in Financial Accounts | 35,000\displaystyle 35,000 | | | - Expenses on issue of shares in Financial Accounts | 30,000\displaystyle 30,000 | | | - Under recovery of administration overheads in Cost Accounts | 25,000\displaystyle 25,000 | | | - Under recovery of selling overheads in Cost Accounts | 35,000\displaystyle 35,000 | 1,25,000\displaystyle 1,25,000 | | | | 3,50,000\displaystyle 3,50,000 | | **Less:** | | | | - Factory overheads overcharged in Cost Accounts | 20,000\displaystyle 20,000 | | | - Undervaluation of closing stock in Cost Accounts | 65,000\displaystyle 65,000 | | | - Interest on bank deposits in Financial Accounts | 60,000\displaystyle 60,000 | | | - Notional rent of own premises charged in Cost Accounts | 30,000\displaystyle 30,000 | | | - Bad debts recovered in Financial Accounts | 50,000\displaystyle 50,000 | (2,25,000)\displaystyle (2,25,000) | | **Net Profit as per Cost Accounts** | | **1,25,000\displaystyle 1,25,000** | --- ### (c) Evaluation of Japanese Client's Special Offer #### (i) Acceptance of the Offer (20,000 units @ ₹ 14 per unit) The production capacity is 80,000 units per year. Presently, the company produces 60,000 units. The proposed export offer is for 20,000 units. Since 60,000+20,000=80,000≤80,000\displaystyle 60,000 + 20,000 = 80,000 \le 80,000 (capacity), there is no curtailment of domestic sales. | Particulars | Existing (60,000 units) (₹) | Export Offer (20,000 units) (₹) | Total (80,000 units) (₹) | | :--- | :---: | :---: | :---: | | **Sales** | 12,00,000\displaystyle 12,00,000 | 2,80,000\displaystyle 2,80,000 | 14,80,000\displaystyle 14,80,000 | | **Less: Variable Costs** | | | | | - Direct Materials (@ ₹ 6) | 3,60,000\displaystyle 3,60,000 | 1,20,000\displaystyle 1,20,000 | 4,80,000\displaystyle 4,80,000 | | - Direct Labour (@ ₹ 4) | 2,40,000\displaystyle 2,40,000 | 80,000\displaystyle 80,000 | 3,20,000\displaystyle 3,20,000 | | - Variable Overheads (@ ₹ 2) | 1,20,000\displaystyle 1,20,000 | 40,000\displaystyle 40,000 | 1,60,000\displaystyle 1,60,000 | | - Additional Shipping Cost | - | 8,000\displaystyle 8,000 | 8,000\displaystyle 8,000 | | **Contribution** | **4,80,000\displaystyle 4,80,000** | **32,000\displaystyle 32,000** | **5,12,000\displaystyle 5,12,000** | | **Less: Fixed Cost** | 3,00,000\displaystyle 3,00,000 | - | 3,00,000\displaystyle 3,00,000 | | **Net Profit** | **1,80,000\displaystyle 1,80,000** | **32,000\displaystyle 32,000** | **2,12,000\displaystyle 2,12,000** | **Advice:** The profit increases by ₹ 32,000\displaystyle 32,000 (from ₹ 1,80,000\displaystyle 1,80,000 to ₹ 2,12,000\displaystyle 2,12,000). Hence, the offer from the Japanese client should be accepted. #### (ii) Advice if the Customer is Local Yes, the advice would be different if the customer is local. Selling at a discounted price of ₹ 14\displaystyle 14 (as compared to the regular selling price of ₹ 20\displaystyle 20) to a local customer might affect the existing domestic market structure, causing other local buyers to demand lower prices, which would reduce profitability. #### (iii) Analysis of 30,000 units Offer @ ₹ 14 (No Part Supply) - Since the capacity is 80,000 units, accepting the 30,000 units export order means domestic sales must be curtailed to 80,000−30,000=50,000\displaystyle 80,000 - 30,000 = 50,000 units. - Variable shipping cost is ₹ 8,00020,000=₹ 0.40\displaystyle \frac{8,000}{20,000} = \text{₹ } 0.40 per unit. For 30,000 units, the shipping cost is 30,000×0.40=₹ 12,000\displaystyle 30,000 \times 0.40 = \text{₹ } 12,000. | Particulars | Computation | Amount (₹) | | :--- | :--- | :---: | | **Sales** | | | | - Domestic | 50,000 units×₹ 20\displaystyle 50,000 \text{ units} \times \text{₹ } 20 | 10,00,000\displaystyle 10,00,000 | | - Export | 30,00,000 units×₹ 14\displaystyle 30,00,000 \text{ units} \times \text{₹ } 14 | 4,20,000\displaystyle 4,20,000 | | **Total Sales** | | **14,20,000\displaystyle 14,20,000** | | **Less: Variable Costs** | | | | - Direct Materials | 80,000 units×₹ 6\displaystyle 80,000 \text{ units} \times \text{₹ } 6 | 4,80,000\displaystyle 4,80,000 | | - Direct Labour | 80,000 units×₹ 4\displaystyle 80,000 \text{ units} \times \text{₹ } 4 | 3,20,000\displaystyle 3,20,000 | | - Variable Overheads | 80,000 units×₹ 2\displaystyle 80,000 \text{ units} \times \text{₹ } 2 | 1,60,000\displaystyle 1,60,000 | | - Additional Shipping Cost | 30,000 units×₹ 0.40\displaystyle 30,000 \text{ units} \times \text{₹ } 0.40 | 12,000\displaystyle 12,000 | | **Total Variable Cost** | | **9,72,000\displaystyle 9,72,000** | | **Contribution** | | **4,48,000\displaystyle 4,48,000** | | **Less: Fixed Cost** | | 3,00,000\displaystyle 3,00,000 | | **Profit** | | **1,48,000\displaystyle 1,48,000** | **Conclusion:** The net profit decreases from ₹ 1,80,000\displaystyle 1,80,000 to ₹ 1,48,000\displaystyle 1,48,000 (a reduction of ₹ 32,000\displaystyle 32,000). Therefore, the company should not accept this offer.

Key Concepts to Understand

Supply

Total amount of a good available to consumers.

Net Profit

The final profit of a business after deducting all indirect operating expenses, non-operating expenses, and taxes from Gross Profit. It represents the actual earnings available to the owners.

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