Cost and Management AccountingQuestion 5484 of 251
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Question 5 (a) This data pertains to the three machines operating in the manufacturing division of PQR Corp for the financial year 2023-2024: Particulars Estimated Expenses TOTAL (`) Machines X (`) Y (`) Z (`) Direct Labour Expenses (per quarter) 2,50,000 Oil Expenses (per quarter) 1,03,125 37,500 37,500 28,125 Machine Insurance Expenses (per quarter) 60,000 Depreciation (per annum) 6,00,000 1,00,000 2,00,000 3,00,000 Building Maintenance Expenses (per quarter) 1,00,000 Wages of Operator (per quarter) 2,25,000 Electricity Expenses (per quarter) 3,00,000 Rent and Rates (per month) 80,000 Salary of Technician (per month) 62,500 (The Technician works only on machines X and Y and the Operator controls all three machines and both spend equal time on each of the machines worked upon by them.) COST AND MANAGEMENT ACCOUNTING There are 14 holidays besides Sundays in the year, of which six are on Saturdays. There was a Strike of workers for 5 working days (including one Saturday). The manufacturing department operates for 8 hours per day on regular week days, while on Saturdays, the operating hours are reduced by 2 hours per day. All machines operate at 80% capacity throughout the year. Assume 366 days in a year. The following additional information is also available: (i) A 20% hike in the price of oil. (ii) A 10% rise in Oil consumption for machines 'X' and 'Y' only. (iii) Particulars Machines X Y Z No. of Workers 5 3 2 Ratio of K.W. Rating 3 3 4 Ratio of Floor space utilized 1 2 1 Required: Prepare a Statement detailing the allocation of expenses to each machine on an annual basis and thereafter, compute the comprehensive machine hour rate for each of the specified machine. (7 Marks) (b) ABC Ltd. is a well-known company for producing baby care products. The company produces and sells two variants of organic shampoo for children: "Baby Rose" and "Baby Lily". The sales and cost data for both products are provided below: Particulars Baby Rose Baby Lily Current demand and Sales (Number of bottles) 4,000 3,000 Production Capacity (Number of bottles) 7,500 6,000 Selling Price per bottle (`) 600 750 Variable Costs per bottle: - Direct Materials (` 20 Per litre) 160 200 - Other Variable Costs 270 350 The fixed costs amount to ` 5,00,000 and ` 4,50,000 for Baby Rose and Baby Lily respectively. The Production Manager has informed that 1,00,000 litres of material is available for production. A dealer has approached the company and proposed to purchase both products at the existing selling prices, which are to be produced by utilizing the remaining unused material. However, he has insisted that all the bottles must be packed with eco-friendly packaging, which will result in an additional cost of ` 10 per bottle for the company. Presently, the company is not using eco-friendly material for packing of bottles. Required: Prepare a detailed statement showing the overall contribution and profit of the company after acceptance of the dealer's proposal. (7 Marks)

Options

A
B
C
D
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Correct Answer

✅ Option descriptive — Correct Option

All Options:

  • A
  • B
  • C
  • D

Detailed Solution & Explanation

### (a) Statement of Allocation of Expenses & Machine Hour Rate Calculation #### 1. Working Notes for Effective Working Hours: - Total days in a year: 366\displaystyle 366 days (Leap year 2023-2024) - Less Shutdown Days: - Sundays: 52\displaystyle 52 days - Holidays (besides Sundays): 14\displaystyle 14 days - Strike: 5\displaystyle 5 days - **Total Shutdown Days:** 71\displaystyle 71 days - Working Saturdays: - Total Saturdays = 52\displaystyle 52 - Less: Holidays falling on Saturdays = (6)\displaystyle (6) - Less: Strike period falling on Saturdays = (1)\displaystyle (1) - **Net Working Saturdays:** 45\displaystyle 45 days - Full working days (weekdays): - Total Days−Shutdown Days−Working Saturdays=366−71−45=250\displaystyle \text{Total Days} - \text{Shutdown Days} - \text{Working Saturdays} = 366 - 71 - 45 = 250 days - Total Working Hours per Annum: - Regular week days: 250 days×8 hours/day=2,000\displaystyle 250 \text{ days} \times 8 \text{ hours/day} = 2,000 hours - Saturdays: 45 days×6 hours/day=270\displaystyle 45 \text{ days} \times 6 \text{ hours/day} = 270 hours - **Total Hours:** 2,270\displaystyle 2,270 hours - **Effective Working Hours (at 80% capacity):** 2,270×80%=1,816 hours per machine per annum2,270 \times 80\% = 1,816 \text{ hours per machine per annum} #### 2. Apportionment Statement: | Particulars | Apportionment Basis | Total (₹) | Machine X (₹) | Machine Y (₹) | Machine Z (₹) | | :--- | :--- | :---: | :---: | :---: | :---: | | **A. Standing Charges:** | | | | | | | Direct Labour | Workers (5:3:2\displaystyle 5:3:2) | 10,00,000\displaystyle 10,00,000 | 5,00,000\displaystyle 5,00,000 | 3,00,000\displaystyle 3,00,000 | 2,00,000\displaystyle 2,00,000 | | Wages of Operator | Equal (1:1:1\displaystyle 1:1:1) | 9,00,000\displaystyle 9,00,000 | 3,00,000\displaystyle 3,00,000 | 3,00,000\displaystyle 3,00,000 | 3,00,000\displaystyle 3,00,000 | | Machine Insurance | Depreciation (1:2:3\displaystyle 1:2:3) | 2,40,000\displaystyle 2,40,000 | 40,000\displaystyle 40,000 | 80,000\displaystyle 80,000 | 1,20,000\displaystyle 1,20,000 | | Building Maintenance | Floor Space (1:2:1\displaystyle 1:2:1) | 4,00,000\displaystyle 4,00,000 | 1,00,000\displaystyle 1,00,000 | 2,00,000\displaystyle 2,00,000 | 1,00,000\displaystyle 1,00,000 | | Rent and Rates | Floor Space (1:2:1\displaystyle 1:2:1) | 9,60,000\displaystyle 9,60,000 | 2,40,000\displaystyle 2,40,000 | 4,80,000\displaystyle 4,80,000 | 2,40,000\displaystyle 2,40,000 | | Salary of Technician | X & Y (1:1:0\displaystyle 1:1:0) | 7,50,000\displaystyle 7,50,000 | 3,75,000\displaystyle 3,75,000 | 3,75,000\displaystyle 3,75,000 | - | | **Total Standing Charges (A)** | | **42,50,000\displaystyle 42,50,000** | **15,55,000\displaystyle 15,55,000** | **17,35,000\displaystyle 17,35,000** | **9,60,000\displaystyle 9,60,000** | | Standing Charges Rate per hour | (Total ÷ 1,816\displaystyle 1,816) | | **856.28\displaystyle 856.28** | **955.40\displaystyle 955.40** | **528.63\displaystyle 528.63** | | **B. Machine Expenses:** | | | | | | | Oil Expenses | Direct (WN1) | 5,31,000\displaystyle 5,31,000 | 1,98,000\displaystyle 1,98,000 | 1,98,000\displaystyle 1,98,000 | 1,35,000\displaystyle 1,35,000 | | Depreciation | Direct | 6,00,000\displaystyle 6,00,000 | 1,00,000\displaystyle 1,00,000 | 2,00,000\displaystyle 2,00,000 | 3,00,000\displaystyle 3,00,000 | | Electricity Expenses | K.W. Rating (3:3:4\displaystyle 3:3:4) | 12,00,000\displaystyle 12,00,000 | 3,60,000\displaystyle 3,60,000 | 3,60,000\displaystyle 3,60,000 | 4,80,000\displaystyle 4,80,000 | | **Total Machine Expenses (B)** | | **23,31,000\displaystyle 23,31,000** | **6,58,000\displaystyle 6,58,000** | **7,58,000\displaystyle 7,58,000** | **9,15,000\displaystyle 9,15,000** | | Machine Expenses Rate per hour | (Total ÷ 1,816\displaystyle 1,816) | | **362.33\displaystyle 362.33** | **417.40\displaystyle 417.40** | **503.85\displaystyle 503.85** | | **Comprehensive Machine Hour Rate (A+B)** | | | **1,218.61\displaystyle 1,218.61** | **1,372.80\displaystyle 1,372.80** | **1,032.48\displaystyle 1,032.48** | **WN1: Oil Expenses Adjustment:** - Base Annual Oil Expenses: - X: 37,500×4=₹ 1,50,000\displaystyle 37,500 \times 4 = \text{₹ } 1,50,000 - Y: 37,500×4=₹ 1,50,000\displaystyle 37,500 \times 4 = \text{₹ } 1,50,000 - Z: 28,125×4=₹ 1,12,500\displaystyle 28,125 \times 4 = \text{₹ } 1,12,500 - Price Hike @ 20%: - X: 1,50,000×20%=₹ 30,000\displaystyle 1,50,000 \times 20\% = \text{₹ } 30,000 (New subtotal = ₹ 1,80,000\displaystyle 1,80,000) - Y: 1,50,000×20%=₹ 30,000\displaystyle 1,50,000 \times 20\% = \text{₹ } 30,000 (New subtotal = ₹ 1,80,000\displaystyle 1,80,000) - Z: 1,12,500×20%=₹ 22,500\displaystyle 1,12,500 \times 20\% = \text{₹ } 22,500 (New subtotal = ₹ 1,35,000\displaystyle 1,35,000) - Consumption Increase @ 10% (X and Y only): - X: 1,80,000×10%=₹ 18,000\displaystyle 1,80,000 \times 10\% = \text{₹ } 18,000 (Total = ₹ 1,98,000\displaystyle 1,98,000) - Y: 1,80,000×10%=₹ 18,000\displaystyle 1,80,000 \times 10\% = \text{₹ } 18,000 (Total = ₹ 1,98,000\displaystyle 1,98,000) - Z: Nil (Total = ₹ 1,35,000\displaystyle 1,35,000) --- ### (b) Product Profitability and Dealer's Proposal Analysis #### 1. Material Usage for Existing Sales: - Baby Rose: 4,000 bottles×8 litres=32,000\displaystyle 4,000 \text{ bottles} \times 8 \text{ litres} = 32,000 litres - Baby Lily: 3,000 bottles×10 litres=30,000\displaystyle 3,000 \text{ bottles} \times 10 \text{ litres} = 30,000 litres - **Total Material Used:** 62,000\displaystyle 62,000 litres - **Unused Material Remaining:** 1,00,000−62,000=38,000\displaystyle 1,00,000 - 62,000 = 38,000 litres #### 2. Contribution Ranking under Dealer's Proposal (with ₹ 10 eco-friendly packaging cost): - **Baby Rose:** Contribution/bottle=600−(160+270+10)=₹ 160\text{Contribution/bottle} = 600 - (160 + 270 + 10) = \text{₹ } 160 Contribution/litre=₹ 1608 litres=₹ 20 (Rank I)\text{Contribution/litre} = \frac{\text{₹ } 160}{8 \text{ litres}} = \text{₹ } 20 \text{ (Rank I)} - **Baby Lily:** Contribution/bottle=750−(200+350+10)=₹ 190\text{Contribution/bottle} = 750 - (200 + 350 + 10) = \text{₹ } 190 Contribution/litre=₹ 19010 litres=₹ 19 (Rank II)\text{Contribution/litre} = \frac{\text{₹ } 190}{10 \text{ litres}} = \text{₹ } 19 \text{ (Rank II)} #### 3. Optimal Production Plan for the Remaining 38,000 Litres: - **Produce Baby Rose up to capacity:** - Remaining capacity = 7,500−4,000=3,500\displaystyle 7,500 - 4,000 = 3,500 bottles. - Material required = 3,500×8 litres=28,000\displaystyle 3,500 \times 8 \text{ litres} = 28,000 litres. - Balance material = 38,000−28,000=10,000\displaystyle 38,000 - 28,000 = 10,000 litres. - **Produce Baby Lily using the remaining material:** - Units of Baby Lily = 10,000 litres10 litres/bottle=1,000\displaystyle \frac{10,000 \text{ litres}}{10 \text{ litres/bottle}} = 1,000 bottles. #### 4. Overall Profitability Statement after Proposal Acceptance: | Particulars | Baby Rose (7,500 units) (₹) | Baby Lily (4,000 units) (₹) | Total (₹) | | :--- | :---: | :---: | :---: | | **Sales Value:** | | | | | - Current Sales | 4,000×600=24,00,000\displaystyle 4,000 \times 600 = 24,00,000 | 3,000×750=22,50,000\displaystyle 3,000 \times 750 = 22,50,000 | 46,50,000\displaystyle 46,50,000 | | - Additional Sales | 3,500×600=21,00,000\displaystyle 3,500 \times 600 = 21,00,000 | 1,000×750=7,50,000\displaystyle 1,000 \times 750 = 7,50,000 | 28,50,000\displaystyle 28,50,000 | | **Total Sales (A)** | **45,00,000\displaystyle 45,00,000** | **30,00,000\displaystyle 30,00,000** | **75,00,000\displaystyle 75,00,000** | | **Variable Costs:** | | | | | - Direct Materials | 7,500×160=12,00,000\displaystyle 7,500 \times 160 = 12,00,000 | 4,000×200=8,00,000\displaystyle 4,000 \times 200 = 8,00,000 | 20,00,000\displaystyle 20,00,000 | | - Other Variable Costs | 7,500×270=20,25,000\displaystyle 7,500 \times 270 = 20,25,000 | 4,000×350=14,00,000\displaystyle 4,000 \times 350 = 14,00,000 | 34,25,000\displaystyle 34,25,000 | | - Additional Packaging | 3,500×10=35,000\displaystyle 3,500 \times 10 = 35,000 | 1,000×10=10,000\displaystyle 1,000 \times 10 = 10,000 | 45,000\displaystyle 45,000 | | **Total Variable Cost (B)** | **32,60,000\displaystyle 32,60,000** | **22,10,000\displaystyle 22,10,000** | **54,70,000\displaystyle 54,70,000** | | **Total Contribution (A-B)** | **12,40,000\displaystyle 12,40,000** | **7,90,000\displaystyle 7,90,000** | **20,30,000\displaystyle 20,30,000** | | **Less: Fixed Costs** | 5,00,000\displaystyle 5,00,000 | 4,50,000\displaystyle 4,50,000 | 9,50,000\displaystyle 9,50,000 | | **Net Profit** | **7,40,000\displaystyle 7,40,000** | **3,40,000\displaystyle 3,40,000** | **10,80,000\displaystyle 10,80,000** |

Key Concepts to Understand

Depreciation

Allocation of the cost of a tangible fixed asset over its useful life due to wear and tear, efflux of time, or obsolescence.

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