Question 2 (a) MNP Limited have the capacity to produce 84,000 units of a product very month. Its prime cost per unit at various levels of producti...

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Question 2 (a) MNP Limited have the capacity to produce 84,000 units of a product very month. Its prime cost per unit at various levels of production is as follows: Level Prime Cost per unit () 10% 50 20% 48 30% 46 40% 44 50% 42 60% 40 70% 38 80% 36 90% 34 100% 32 Its prime cost consists of raw material consumed, direct wages and direct expenses in the ratio of 3 : 2 : 1. In the month of January 2024, the company worked at 40% capacity and raw material purchased amounting to 8,40,000. In the month of February 2024, the company worked at 100% capacity and raw material purchased for 16,46,400. It is the policy of the company to maintain opening stock of raw material equal to 1/3 of closing stock of raw material. Factory overheads are recovered at 60% of direct wages cost. Fixed administration expenses (as part of production cost) and fixed selling and distribution expenses are 2,01,600 and 1,68,000 per month respectively. During the month of January 2024 company sold 33,600 units @ 68.8 per unit. The variable distribution cost amounts to 1.5 per unit sold. The management of the company chalks out a pl for the month of February 2024 to sell its whole output @ 61 per unit by incurring following further expenditure : (i) Company sponsors a television programme on every Sunday at a cost of 26,250 per week. There are 4 Sundays in February 2024. (ii) Hi-tea programme every month for its potential customers at a cost of 1,05,000. (iii) Special gift item costing 105 on sale of a dozen units. (iv) Lucky draws scheme is introduced every month by giving the first prize of 1,00,000; second prize of 80,000; third prize of 40,000 and four consolation prizes of 8,000 each. Note: (In the month of February 2024, there is a significant saving in material cost per unit due to entry of new suppliers in the market and saving in per unit cost of Direct wages and Direct expenses due to introduction of new· policy by the management.) Prepare a cost sheet for the month of January 2024 and February 2024 showing prime cost (with different elements of prime cost), factory cost, cost of production, total cost and profit earned. (8 Marks) (b) In a factory there are 50 workers, working 8 hours per day including 30 minutes for lunch break, worked for 160 days during a period of six months ended on 31st December, 2023. During this period total employee's cost was recorded 3,90,000. The management of the factory decided the overtime premium rates for the month of January 2024 as under : Sundays and holidays 180% of basic wages rate Before and after normal working hours 160% of basic wages rate COST AND MANAGEMENT ACCOUNTING During the last six months (ended on 31st December, 2023), the following hours were worked: Normal time 56,250 Sundays and holidays 750 Before and after normal working hours 3,000 Total hours· 60,000 During the month of January 2024, the factory worked on a job BX in the following manner. Normal working 2,400 men hours Overtime on Sundays and holidays 200 men hours Overtime before and after normal working 400 men hours Total hours 3,000 You are required to calculate the labour cost chargeable to job BX and overheads in each of the following situations: (i) Where overtime is worked regularly in whole year as a policy on account of shortage of workers. (ii) Where overtime is worked irregularly to meet the requirement of production. (iii) Where overtime is worked at the request of the customer to complete the job in time. (iv) Where overtime is worked on account of flood in the area. (6 Marks)

Accepted Answer

Answer Solution: (a) Cost Sheet Particulars January 2024 February 2024 33,600 Units 84,000 Units Opening Stock of Raw Material 50,400 1,51,200 Add: Purchases 8,40,000 16,46,400 Less: Closing stock of Raw Material (1,51,200) (4,53,600) Direct materials consumed: 7,39,200 13,44,000 Direct Wages 4,92,800 8,96,000 Direct expenses 2,46,400 4,48,000 Prime Cost 14,78,400 26,88,000 Factory overheads (60% of direct wages) 2,95,680 5,37,600 Factory / Works Cost 17,74,080 32,25,600 Add: Administration overhead (Production) 2,01,600 2,01,600 Cost of Production / Cost of goods sold 19,75,680 34,27,200 Add: Fixed selling and distribution Overhead 1,68,000 1,68,000 Variable distribution overheads ( 1.5 per unit) 50,400 1,26,000 - Sponsorship cost - 1,05,000 - Hi tea programme - 1,05,000 - Special gifts (84,000 x 1/12 x 105) - 7,35,000 - Lucky draw prize - 2,52,000 Cost of sales / Total Cost 21,94,080 49,18,200 Profit (Balancing figure) 1,17,600 2,05,800 Sales revenue 23,11,680 51,24,000 Lucky draw prize: Amount () 1st Prize 1,00,000 2nd Prize 80,000 3rd Prize 40,000 Consolation Prizes (4 × 8,000) 32,000 Total 2,52,000 COST AND MANAGEMENT ACCOUNTING Working note : Calculation of opening and costing stock of Raw Material January Units Manufactured = 84,000 x 40% = 33,600 units Prime Cost = 33,600 x 44 = 14,78,400 Raw Material consumed = 14,78,400 X 3/6 = 7,39,200 Raw Material purchase (given) = 8,40,000 Let closing stock of Raw Material be x Opening stock of Raw Material be 1/3x Opening Stock + Purchase – closing stock = Raw Material consumed 1/3x + 8,40,000 – x = 7,39,200 1/3x – x = 7,39,200 – 8,40,000 2/3x = 1,00,800 x = 1,51,200 (closing stock) Opening stock = 1,51,200 x 1/3 = 50,400 February Prime Cost = 84,000 x 32 = 26,88,000 Raw Material consumed = 26,88,000 x 3/6 = 13,44,000 Raw Material purchased (given) = 16,46,400 Opening Stock + Purchase – closing stock = Raw Material consumed 1,51,200 + 16,46,400 – closing stock = 13,44,000 Closing stock = 4,53,600 (b) Workings Calculation of Basic Wage Rate Effective Working Hours for six months ended 31st December, 2023 = 50 workers x (8-0.5) hours per day x 160 days = 60,000 hours Basic Wage Rate = 3,90,000 60,000 = 6.50 per hour Basic wage rate : 6.50 per hour Overtime wage rate for Sundays and holidays : 6.50 × 180% = 11.70 per hour Overtime wage rate before and after working hours : 6.50 × 160% = 10.40 per hour Computation of average inflated wage rate (including overtime premium): Particulars () Annual wages for the normal time (56,250 hrs × 6.50) 3,65,625 Wages for overtime on Sundays and holidays (750 hrs × 11.70) 8,775 Wages for overtime before and after working hours (3,000 hrs × 10.40) 31,200 Total wages for 60,000 hrs 4,05,600 Average inflated wage rate = 4,05,600 60,000 hours= 6.76 per hour (a) Where overtime is worked regularly as a policy due to shortage of workers: The overtime premium is treated as a part of employee cost and job is charged at an inflated wage rate. Hence, employee cost chargeable to job BX = Total hours × Inflated wage rate = 3,000 hrs. × 6.76 = 20,280 COST AND MANAGEMENT ACCOUNTING (b) Where overtime is worked irregularly to meet the requirements of production: Basic wage rate is charged to the job and overtime premium is charged to factory overheads as under: Employee cost chargeable to Job BX: 3,000 hours @ 6.50 per hour = 19,500 Factory overhead: 200 hrs. × (11.70 – 6.50) + 400hrs × (10.40 – 6.50) = 1,040 + 1,560 = 2,600 (c) Where overtime is worked at the request of the customer to complete the job in time. Basic wage rate is charged to the job and overtime premium is charged to job as under: Employee cost chargeable to Job BX: 3,000 hours @ 6.50 per hour = 19,500 Overtime premium: 200 hrs × (11.70 – 6.50) + 400hrs × (10.40 – 6.50) = 1,040 + 1,560 = 2,600 Total = 19,500 + 2,600 = 22,100 (d) Where overtime is worked on account of flood in the area Basic wage rate is charged to the job and overtime premium is charged to costing P & L Account as under: Employee cost chargeable to Job BX: 3,000 hours @ 6.50 per hour = 19,500 Costing P&L A/c : 200 hrs × (11.70 – 6.50) + 400hrs × (10.40 – 6.50) = 1,040 + 1,560 = 2,600 Total = 19,500 + 2,600 = 22,100

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