Cost and Management AccountingQuestion 5482 of 251
All Questions

Question 3 (a) GST Limited is a multi-product company. The production and cost details of its two products P and Q are given as follows: Particulars Product P Q Quantity produced (No.) 9,000 7,200 Direct material cost (`) 72,000 50,000 Direct labour hours 800 600 Purchase requisition (No.) 180 144 Production runs (No.) 144 108 Quality inspections (No.) 27 18 Direct wages rate is ` 14.50 per hour. Presently the company uses a single overhead recovery rate based on direct labour hours. Overhead incurred by the company during the year 2023-24 are as follows: Technical staff salary ` 45,000 Machine operation expenses ` 1,62,000 Machine maintenance expenses ` 27,000 Wages and salary of stores staff ` 36,000 During this period direct labour hours worked 72,000. Now the Company wants to adopt Activity Based Costing. For this purpose, following activities are identified: - Quality control - Setup of machine for production runs - Store receiving It is also decided that salary of technical staff should be distributed among machine maintenance, setup and quality control in the ratio of 1 : 2 : 2. Machine maintenance expenses and machine operation expenses should be distributed in the ratio of 2 : 3 in between stores and production setup activities. COST AND MANAGEMENT ACCOUNTING During this period cost drivers for these activities are identified as under: - Requisition raised 5,760 - Production setup 7,200 - No. of quality test 720 You are required to compute: (i) The cost of products P and Q based on traditional absorption costing system. (ii) The cost of products P and Q based on ABC Costing system. (8 Marks) (b) Savi Limited is currently working at 80% of its capacity level and furnished the following information for current period: Production / Sales 96,000 units Direct Variable Cost ` 20 per unit Factory Overheads ` 8,40,000 Administrative Overheads (Fixed) ` 20,60,000 Sales Commission 2% of Sales Value Transportation Expenses ` 4,000 per truck (Loading Capacity 4,000 units) The selling price of the product is ` 120 per unit and Factory Overheads are 80% variable in nature. The management of Savi Limited has come.to know that there will be high fluctuations in the demand of the product in upcoming year and it would not be an easy task to predict the demand. Selling price per unit will not be affected by demand fluctuations. Savi Limited has decided to prepare a flexible budget for. the product at 60%, 80% and 100% capacity level. You are required to prepare the Flexible Budget showing total cost of the product at each level. (6 Marks)

For any discrepancies in this question, email contact@cadada.in

Ad

Detailed Solution & Explanation

### (a) (i) Cost under Traditional Absorption Costing System - **Total Production Overheads:** - Technical staff salary: ₹ 45,000\displaystyle 45,000 - Machine operation expenses: ₹ 1,62,000\displaystyle 1,62,000 - Machine maintenance expenses: ₹ 27,000\displaystyle 27,000 - Wages and salary of stores staff: ₹ 36,000\displaystyle 36,000 - **Total Overheads:** ₹ 2,70,000\displaystyle 2,70,000 - **Overhead Recovery Rate:** Rate per Direct Labour Hour=₹ 2,70,00072,000 hours=₹ 3.75 per hour\text{Rate per Direct Labour Hour} = \frac{\text{₹ } 2,70,000}{72,000 \text{ hours}} = \text{₹ } 3.75 \text{ per hour} - **Statement of Cost:** | Particulars | Product P (₹) | Product Q (₹) | | :--- | :---: | :---: | | Direct Materials | 72,000\displaystyle 72,000 | 50,000\displaystyle 50,000 | | Direct Labour (@ ₹ 14.50) | 800 hrs×14.50=11,600\displaystyle 800 \text{ hrs} \times 14.50 = 11,600 | 600 hrs×14.50=8,700\displaystyle 600 \text{ hrs} \times 14.50 = 8,700 | | Production Overheads (@ ₹ 3.75) | 800 hrs×3.75=3,000\displaystyle 800 \text{ hrs} \times 3.75 = 3,000 | 600 hrs×3.75=2,250\displaystyle 600 \text{ hrs} \times 3.75 = 2,250 | | **Total Cost** | **86,600\displaystyle 86,600** | **60,950\displaystyle 60,950** | | Production Quantity (units) | 9,000\displaystyle 9,000 | 7,200\displaystyle 7,200 | | **Cost per Unit** | **9.62\displaystyle 9.62** | **8.47\displaystyle 8.47** | ### (a) (ii) Cost under Activity-Based Costing (ABC) System #### Distribution of Expenses: 1. **Technical Staff Salary** (₹ 45,000) distributed to Machine Maintenance, Setup, and Quality Control in ratio 1:2:2\displaystyle 1:2:2: - Machine Maintenance: 45,000×15=₹ 9,000\displaystyle 45,000 \times \frac{1}{5} = \text{₹ } 9,000 - Production Setup: 45,000×25=₹ 18,000\displaystyle 45,000 \times \frac{2}{5} = \text{₹ } 18,000 - Quality Control: 45,000×25=₹ 18,000\displaystyle 45,000 \times \frac{2}{5} = \text{₹ } 18,000 2. **Machine Maintenance Expenses** total = ₹ 27,000+9,000\displaystyle 27,000 + 9,000 (from Technical Staff Salary) = ₹ 36,000\displaystyle 36,000. Distributed in ratio 2:3\displaystyle 2:3 to Stores and Setup: - Stores Receiving: 36,000×25=₹ 14,400\displaystyle 36,000 \times \frac{2}{5} = \text{₹ } 14,400 - Production Setup: 36,000×35=₹ 21,600\displaystyle 36,000 \times \frac{3}{5} = \text{₹ } 21,600 3. **Machine Operation Expenses** (₹ 1,62,000) distributed in ratio 2:3\displaystyle 2:3 to Stores and Setup: - Stores Receiving: 1,62,000×25=₹ 64,800\displaystyle 1,62,000 \times \frac{2}{5} = \text{₹ } 64,800 - Production Setup: 1,62,000×35=₹ 97,200\displaystyle 1,62,000 \times \frac{3}{5} = \text{₹ } 97,200 4. **Wages & Salary of Stores Staff** (₹ 36,000) allocated to Stores. - **Activity Cost Pools:** | Expense Item | Stores Receiving (₹) | Production Setup (₹) | Quality Control (₹) | | :--- | :---: | :---: | :---: | | Technical Staff Salary | - | 18,000\displaystyle 18,000 | 18,000\displaystyle 18,000 | | Machine Operation Expenses | 64,800\displaystyle 64,800 | 97,200\displaystyle 97,200 | - | | Machine Maintenance Expenses | 14,400\displaystyle 14,400 | 21,600\displaystyle 21,600 | - | | Stores Staff Wages | 36,000\displaystyle 36,000 | - | - | | **Total Cost** | **1,15,200\displaystyle 1,15,200** | **1,36,800\displaystyle 1,36,800** | **18,000\displaystyle 18,000** | - **Activity Cost Driver Rates:** - **Stores Receiving Rate:** Rate=₹ 1,15,2005,760 requisitions=₹ 20 per requisition\text{Rate} = \frac{\text{₹ } 1,15,200}{5,760 \text{ requisitions}} = \text{₹ } 20 \text{ per requisition} - **Production Setup Rate:** Rate=₹ 1,36,8007,200 setups=₹ 19 per setup\text{Rate} = \frac{\text{₹ } 1,36,800}{7,200 \text{ setups}} = \text{₹ } 19 \text{ per setup} - **Quality Control Rate:** Rate=₹ 18,000720 quality tests=₹ 25 per quality test\text{Rate} = \frac{\text{₹ } 18,000}{720 \text{ quality tests}} = \text{₹ } 25 \text{ per quality test} - **Statement of Cost under ABC:** | Particulars | Product P (₹) | Product Q (₹) | | :--- | :---: | :---: | | Direct Materials | 72,000\displaystyle 72,000 | 50,000\displaystyle 50,000 | | Direct Labour | 11,600\displaystyle 11,600 | 8,700\displaystyle 8,700 | | Stores Receiving | 180 requisitions×₹ 20=3,600\displaystyle 180 \text{ requisitions} \times \text{₹ } 20 = 3,600 | 144 requisitions×₹ 20=2,880\displaystyle 144 \text{ requisitions} \times \text{₹ } 20 = 2,880 | | Production Setup | 144 setups×₹ 19=2,736\displaystyle 144 \text{ setups} \times \text{₹ } 19 = 2,736 | 108 setups×₹ 19=2,052\displaystyle 108 \text{ setups} \times \text{₹ } 19 = 2,052 | | Quality Control | 27 tests×₹ 25=675\displaystyle 27 \text{ tests} \times \text{₹ } 25 = 675 | 18 tests×₹ 25=450\displaystyle 18 \text{ tests} \times \text{₹ } 25 = 450 | | **Total Cost** | **90,611\displaystyle 90,611** | **64,082\displaystyle 64,082** | | Production Quantity (units) | 9,000\displaystyle 9,000 | 7,200\displaystyle 7,200 | | **Cost per Unit** | **10.07\displaystyle 10.07** | **8.90\displaystyle 8.90** | --- ### (b) Flexible Budget of Savi Limited #### Workings: - **Capacity Levels:** - 80% Capacity = 96,000\displaystyle 96,000 units. - 60% Capacity = 72,000\displaystyle 72,000 units. - 100% Capacity = 1,20,000\displaystyle 1,20,000 units. - **Factory Overheads:** Total ₹ 8,40,000\displaystyle 8,40,000 at 80% capacity. - Variable = 80%×8,40,000=₹ 6,72,000  ⟹  6,72,00096,000 units=₹ 7\displaystyle 80\% \times 8,40,000 = \text{₹ } 6,72,000 \implies \frac{6,72,000}{96,000 \text{ units}} = \text{₹ } 7 per unit. - Fixed = 20%×8,40,000=₹ 1,68,000\displaystyle 20\% \times 8,40,000 = \text{₹ } 1,68,000. - **Sales Commission:** 2% of Sales Value = 2%×₹ 120=₹ 2.40\displaystyle 2\% \times \text{₹ } 120 = \text{₹ } 2.40 per unit. - **Transportation Expenses:** ₹ 4,000\displaystyle 4,000 per truck of 4,000\displaystyle 4,000 units capacity = ₹ 1\displaystyle 1 per unit. - **Total Variable Cost per unit:** 20 (Direct)+7 (Factory)+2.40 (Commission)+1 (Transportation)=₹ 30.40\displaystyle 20 \text{ (Direct)} + 7 \text{ (Factory)} + 2.40 \text{ (Commission)} + 1 \text{ (Transportation)} = \text{₹ } 30.40 per unit. - **Flexible Budget Statement:** | Particulars | 60% Capacity (72,000 Units) (₹) | 80% Capacity (96,000 Units) (₹) | 100% Capacity (1,20,000 Units) (₹) | | :--- | :---: | :---: | :---: | | **Sales Revenue** (@ ₹ 120) | **86,40,000\displaystyle 86,40,000** | **1,15,20,000\displaystyle 1,15,20,000** | **1,44,00,000\displaystyle 1,44,00,000** | | **Variable Costs:** | | | | | - Direct Variable Cost (@ ₹ 20) | 14,40,000\displaystyle 14,40,000 | 19,20,000\displaystyle 19,20,000 | 24,00,000\displaystyle 24,00,000 | | - Variable Factory Overheads (@ ₹ 7) | 5,04,000\displaystyle 5,04,000 | 6,72,000\displaystyle 6,72,000 | 8,40,000\displaystyle 8,40,000 | | - Sales Commission (@ ₹ 2.40) | 1,72,800\displaystyle 1,72,800 | 2,30,400\displaystyle 2,30,400 | 2,88,000\displaystyle 2,88,000 | | - Transportation Expenses (@ ₹ 1) | 72,000\displaystyle 72,000 | 96,000\displaystyle 96,000 | 1,20,000\displaystyle 1,20,000 | | **Total Variable Cost** | **21,88,800\displaystyle 21,88,800** | **29,18,400\displaystyle 29,18,400** | **36,48,000\displaystyle 36,48,000** | | **Contribution** | **64,51,200\displaystyle 64,51,200** | **86,01,600\displaystyle 86,01,600** | **1,07,52,000\displaystyle 1,07,52,000** | | **Fixed Costs:** | | | | | - Administrative Overheads | 20,60,000\displaystyle 20,60,000 | 20,60,000\displaystyle 20,60,000 | 20,60,000\displaystyle 20,60,000 | | - Fixed Factory Overheads | 1,68,000\displaystyle 1,68,000 | 1,68,000\displaystyle 1,68,000 | 1,68,000\displaystyle 1,68,000 | | **Total Fixed Costs** | **22,28,000\displaystyle 22,28,000** | **22,28,000\displaystyle 22,28,000** | **22,28,000\displaystyle 22,28,000** | | **Net Profit** | **42,23,200\displaystyle 42,23,200** | **63,73,600\displaystyle 63,73,600** | **85,24,000\displaystyle 85,24,000** | | **Total Cost** | **44,16,800\displaystyle 44,16,800** | **51,46,400\displaystyle 51,46,400** | **58,76,000\displaystyle 58,76,000** |

More Questions from Cost and Management Accounting

The value of N\displaystyle N in N!+17!=18!\displaystyle N! + \frac{1}{7!} = \frac{1}{8!} is

A person can go from place 'A' to 'B' by 11 different modes of transport but is allowed to return to 'A' by any mode other than the one earlier. The number of different ways in which the entire journey can be completed is:

If a man travels from place A to B in 10 ways then by how many ways can he come back by another train?

If n!10(n−1)!=(n−1)!(n−3)!\displaystyle \frac{n!}{10(n-1)!} = \frac{(n-1)!}{(n-3)!} find 'n'.

Which of the following is a correct statement.

nP3=2⋅nP2\displaystyle ^nP_3 = 2 \cdot ^nP_2. Find n\displaystyle n.

Ready to Master Cost and Management Accounting?

Practice all 251 questions with instant feedback, earn XP, track your streaks, and ace your CA Foundation exam.

Start Practicing — It's Free