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Question 4 (a) BG company produces a standard product and sold in a packet of 10 kg. The standard cost card per pack is as follows: Direct Material: A - 4 kg @ ` 50 per kg COST AND MANAGEMENT ACCOUNTING B - 8 kg @ ` 40 per kg Direct Labour: 6 hours @ ` 20 per hour The company manufactured and sold 1,600 packets during the month. Actual data for material and labour recorded as under. Direct Material: A - 7,000 kg @ ` 40 B - 12,500 kg @ ` 45 Labour hours paid for two different categories of workers: Skilled 6,000 hours @ ` 25 Semi-skilled 4,000 hours @ ` 20 5% of the time paid was lost due to an abnormal reason. Calculate the following variances indicating their nature (Favourable or Adverse): (i) Material cost variances (ii) Material price variances (iii) Material usage variances (iv) Material mix variances (v) Material yield variances (vi) Labour cost variances (vii) Labour rate variances (viii)Labour efficiency variances (ix) Labour Idle time variances (9 Marks) (b) Explain Build-Operate-Transfer (BOT) approach and classify the following expenses in Capital Cost or Operating and Maintenance Cost for Toll Roads: (i) Land acquisition (ii) Interest expenses incurred for servicing term loans (iii) Material and Labour (iv) Toll Collection Expenses (v) Contingency Allowance (vi) Periodic painting cost of railings etc. (2 + 3 = 5 Marks)

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Detailed Solution & Explanation

### (a) Material and Labour Variances #### 1. Material Variances Table: - Standard Quantity (SQ) for 1,600 packets: - Material A: 1,600×4 kg=6,400\displaystyle 1,600 \times 4 \text{ kg} = 6,400 kg - Material B: 1,600×8 kg=12,800\displaystyle 1,600 \times 8 \text{ kg} = 12,800 kg - Actual Quantity (AQ): - Material A: 7,000\displaystyle 7,000 kg - Material B: 12,500\displaystyle 12,500 kg - Revised Standard Quantity (RSQ) in Standard Ratio (1:2\displaystyle 1:2): - Material A: 19,500×13=6,500\displaystyle 19,500 \times \frac{1}{3} = 6,500 kg - Material B: 19,500×23=13,000\displaystyle 19,500 \times \frac{2}{3} = 13,000 kg | Variance Type | Formula | Material A (₹) | Material B (₹) | Total (₹) | | :--- | :--- | :---: | :---: | :---: | | **(i) Material Cost Variance** | SC−AC\displaystyle SC - AC | 3,20,000−2,80,000\displaystyle 3,20,000 - 2,80,000 | 5,12,000−5,62,500\displaystyle 5,12,000 - 5,62,500 | **10,500\displaystyle 10,500 (A)** | | **(ii) Material Price Variance** | (SP−AP)×AQ\displaystyle (SP - AP) \times AQ | (50−40)×7,000\displaystyle (50 - 40) \times 7,000 | (40−45)×12,500\displaystyle (40 - 45) \times 12,500 | **7,500\displaystyle 7,500 (F)** | | **(iii) Material Usage Variance** | (SQ−AQ)×SP\displaystyle (SQ - AQ) \times SP | (6,400−7,000)×50\displaystyle (6,400 - 7,000) \times 50 | (12,800−12,500)×40\displaystyle (12,800 - 12,500) \times 40 | **18,000\displaystyle 18,000 (A)** | | **(iv) Material Mix Variance** | (RSQ−AQ)×SP\displaystyle (RSQ - AQ) \times SP | (6,500−7,000)×50\displaystyle (6,500 - 7,000) \times 50 | (13,000−12,500)×40\displaystyle (13,000 - 12,500) \times 40 | **5,000\displaystyle 5,000 (A)** | | **(v) Material Yield Variance** | (SQ−RSQ)×SP\displaystyle (SQ - RSQ) \times SP | (6,400−6,500)×50\displaystyle (6,400 - 6,500) \times 50 | (12,800−13,000)×40\displaystyle (12,800 - 13,000) \times 40 | **13,000\displaystyle 13,000 (A)** | #### 2. Labour Variances Table: - Standard Hours (SH) = 1,600 packets×6 hours=9,600\displaystyle 1,600 \text{ packets} \times 6 \text{ hours} = 9,600 hours. - Standard Rate (SR) = ₹ 20\displaystyle 20 per hour. - Actual Hours Paid (AH Paid) = 6,000+4,000=10,000\displaystyle 6,000 + 4,000 = 10,000 hours. - Actual Cost (AC) = (6,000×25)+(4,000×20)=₹ 2,30,000\displaystyle (6,000 \times 25) + (4,000 \times 20) = \text{₹ } 2,30,000. - Idle Hours = 10,000×5%=500\displaystyle 10,000 \times 5\% = 500 hours. - Actual Hours Worked (AH Worked) = 10,000−500=9,500\displaystyle 10,000 - 500 = 9,500 hours. | Variance Type | Formula | Computation | Result (₹) | | :--- | :--- | :--- | :---: | | **(vi) Labour Cost Variance** | (SH×SR)−AC\displaystyle (SH \times SR) - AC | (9,600×20)−2,30,000\displaystyle (9,600 \times 20) - 2,30,000 | **38,000\displaystyle 38,000 (A)** | | **(vii) Labour Rate Variance** | (SR−AR)×AH\displaystyle (SR - AR) \times AH | (20−25)×6,000+(20−20)×4,000\displaystyle (20-25)\times 6,000 + (20-20)\times 4,000 | **30,000\displaystyle 30,000 (A)** | | **(viii) Labour Efficiency Variance** | (SH−AH worked)×SR\displaystyle (SH - \text{AH worked}) \times SR | (9,600−9,500)×20\displaystyle (9,600 - 9,500) \times 20 | **2,000\displaystyle 2,000 (F)** | | **(ix) Labour Idle Time Variance** | Idle Hours×SR\displaystyle \text{Idle Hours} \times SR | 500 hours×20\displaystyle 500 \text{ hours} \times 20 | **10,000\displaystyle 10,000 (A)** | --- ### (b) Build-Operate-Transfer (BOT) and Expense Classification #### 1. Build-Operate-Transfer (BOT) Approach: BOT is an infrastructure project delivery mechanism where the government grants a concession to a private consortium to design, finance, construct, and operate a facility (e.g., a highway, port, or power plant) for a specified period (concession period). During this period, the private entity operates the facility and collects user fees (tolls, tariffs) to recover its investment and earn a return. At the end of the concession period, ownership of the facility is transferred back to the government at no cost. #### 2. Classification of Expenses: | Expense Item | Classification | | :--- | :--- | | (i) Land acquisition | **Capital Cost** | | (ii) Interest expenses incurred for servicing term loans | **Operating and Maintenance Cost** | | (iii) Material and Labour | **Capital Cost** | | (iv) Toll Collection Expenses | **Operating and Maintenance Cost** | | (v) Contingency Allowance | **Capital Cost** | | (vi) Periodic painting cost of railings etc. | **Operating and Maintenance Cost** |

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