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: Particular...

Question

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)

Accepted Answer

Answer Solution: (a) (i) Statement Showing “Total Cost - Traditional Method” Particulars of Costs P Q () () Direct Materials 72,000 50,000 Direct Labour [(800,600 hours) × 14.5] 11,600 8,700 Production Overheads [(800,600 hours) × 3.75] (WN1) 3,000 2,250 Total Cost 86,600 60,950 Cost per unit (9,000, 7,200) 9.62 8.47 WN1: Calculation of Production Overhead: () Technical staff salary 45,000 Machine operation expenses 1,62,000 Machine maintenance expenses 27,000 Wages and salary of stores staff 36,000 Total Production Overhead 2,70,000 Total direct labour hours worked 72,000 hours Production Overhead rate per hour 3.75 (ii) Statement Showing “Total Cost - Activity Based Costing” Products P Q Production (units) 9,000 7,200 () () Direct Materials 72,000 50,000 Direct Labour [(800,600 hours) × 14.5] 11,600 8,700 Requisition Related Costs @ 20 per requisition raised (180,144) (WN2) 3,600 2,880 COST AND MANAGEMENT ACCOUNTING Production Setup Costs @ 19 per production runs (144,108) (WN2) 2,736 2,052 Quality Inspection Costs @ 25 per quality test (27,18) (WN2) 675 450 Total Costs 90,611 64,082 Cost per unit (9,000, 7,200) 10.07 8.90 WN2: Statement Showing Distribution of Expenses Machine maintenance expenses Total Stores Production Setup Quality Control Technical staff salary of 45,000 (1:2:2) 9,000 - 18,000 18,000 Machine operation expenses of 1,62,000 (2:3) - 64,800 97,200 - Machine maintenance expenses of 36,000 (2:3) (9,000) 14,400 21,600 - Wages and salary of stores staff - 36,000 - - Total - 1,15,200 1,36,800 18,000 WN3: Cost for each activity cost driver: Activity (1) Total cost () (2) Cost allocation base (3) Cost driver rate (4) = [(2) ÷ (3)] Stores Receiving 1,15,200 5,760 Requisitions Raised 20 per requisition raised Production Setup 1,36,800 7,200 Production Setup 19 per production setup Quality Control 18,000 720 Quality Test 25 per quality test (b) Flexible Budget of Savi Ltd 60% (72,000 units) () 80% (96,000 units) () 100% (1,20,000 units) () Sales (A) 120.00 120.00 120.00 Variable Costs: - Direct Variable Cost 20.00 20.00 20.00 - Variable Factory Overheads (WN1) 7.00 7.00 7.00 - Sales Commission (2%) 2.40 2.40 2.40 - Transportation Expenses 1.00 1.00 1.00 Total Variable Cost (B) 30.40 30.40 30.40 Contribution Per Unit (C) = (A – B) 89.60 89.60 89.60 Total Contribution (D) 64,51,200.00 86,01,600.00 1,07,52,000.00 Fixed Costs: - Administrative Overheads (100%) 20,60,000.00 20,60,000.00 20,60,000.00 - Factory Overheads (20%) 1,68,000.00 1,68,000.00 1,68,000.00 Total Fixed Costs (E) 22,28,000.00 22,28,000.00 22,28,000.00 Profit (D-E) 42,23,200.00 63,73,600.00 85,24,000.00 Total Cost 44,16,800.00 51,46,400.00 58,76,000.00 WN1: Variable factory Overheads = 8,40,000 x 80% = 6,72,000 Variable factory Overheads per unit = 6,72,000/96,000 units = 7

Detailed Solution & Explanation

More Questions from Cost and Management Accounting

Ready to Master Cost and Management Accounting?