Question 5 (a) This data pertains to the three machines operating in the manufacturing division of PQR Corp for the financial year 2023-2024: Parti...

Question

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)

Accepted Answer

Answer Solution: (a) Computation of Comprehensive Machine Hour Rate Particulars Basis of Apportion ment Total () Machines X () Y () Z () Standing Charges (Per Annum) Direct Labour Expenses No. of Workers (5:3:2) 10,00,000 5,00,000 3,00,000 2,00,000 Wages of Operator Equal 9,00,000 3,00,000 3,00,000 3,00,000 Machine Insurance Expenses Depreciation (1:2:3) 2,40,000 40,000 80,000 1,20,000 Building Maintenance Expenses Floor Space (1:2:1) 4,00,000 1,00,000 2,00,000 1,00,000 Rent and Rates Floor Space (1:2:1) 9,60,000 2,40,000 4,80,000 2,40,000 Salary of Technician (1:1:0) 7,50,000 3,75,000 3,75,000 - Total Standing Charges 42,50,000 15,55,000 17,35,000 9,60,000 Hourly Rate (A) 856.28 955.40 528.63 Machine Expenses (Per Annum) COST AND MANAGEMENT ACCOUNTING Oil Expenses Direct (W.N.1) 5,31,000 1,98,000 1,98,000 1,35,000 Depreciation Direct 6,00,000 1,00,000 2,00,000 3,00,000 Electricity Expenses K. W. Rating (3:3:4) 12,00,000 3,60,000 3,60,000 4,80,000 Total Machine Expenses 23,31,000 6,58,000 7,58,000 9,15,000 Hourly Rate (B) 362.33 417.40 503.85 Total Expenses 65,81,000 22,13,000 24,93,000 18,75,000 (A) + (B) 1,218.61 1,372.80 1,032.49 Calculation of Effective Working Hours. Per Machine Per Annum Full Day Working Hours (250 days x 8 hours) 2,000 6 hours per day Working Hours (45 days x 6 hours) 270 Total Hours 2,270 Capacity Utilization 80% Effective working hours 1,816 No. of Shutdown Days Sundays 52 Holidays 14 Strike Period 5 71 No. of 6 Hours Working Days Saturdays 52 Less: Holidays (6) Less: Strike Period (1) 45 No. of Full Working Days Total No of Days in a year 366 Less: No of Shutdown Days (71) Less: No. of 6 Hours Working Days (45) 250 Working notes 1. Calculation of Oil Expenses. Particulars Machines X () Y () Z () Oil Expenses 1,50,000 1,50,000 1,12,500 Add: Increase in Price @20% 30,000 30,000 22,500 1,80,000 1,80,000 1,35,000 Add: Increase in Consumption @10% 18,000 18,000 - Total 1,98,000 1,98,000 1,35,000 (b) Statement showing the Overall contribution and profit of the company Particulars Baby Rose Baby Lily Total () () () Selling price per bottle 600 750 - Less: Direct Materials 160 200 - Other variable costs 270 350 - Additional packaging 10 10 Contribution per bottle 160 190 - Material required per bottle 8 litres 10 Contribution per litre of material 20 19 COST AND MANAGEMENT ACCOUNTING Ranking on the basis of Contribution per litre of material I II Baby Rose (4,000 + 3,500 bottles) Baby Lily (3,000 +1,000 bottles) Selling price per bottle 600 750 - Sales Value 45,00,000 30,00,000 Variable Cost Direct Materials 7,500 units x 160 = 12,00,000 4,000 units x 200 = 8,00,000 Other Variable Costs 7,500 units x 270 = 20,25,000 4,000 units x 350 = 14,00,000 Eco-friendly pack cost 3,500 units x 10 = 35,000 1,000 units x 10 = 10,000 Total Variable Costs 32,60,000 22,10,000 Contribution 4,000 units x 170 3,500 units x 160 = 12,40,000 3,000 units x 200 1,000 units x 190 = 7,90,000 20,30,000 Less: Fixed Cost 5,00,000 4,50,000 9,50,000 Profit 7,40,000 3,40,000 10,80,000 WN1 Baby Rose Baby Lily Raw Material used per unit of bottle (a) 8 litres ( 160/ 20) 10 litres ( 200/ 20) Current Demand and Sales (b) 4,000 bottles 3,000 bottles Total Raw Material used (c = a x b) 32,000 litres 30,000 litres WN2 Raw Material available after current sales = 1,00,000 litres – 62,000 litres = 38,000 litres Since the contribution per unit of Baby Rose is higher than Baby Lily, the company will produce and sale Baby Rose shampoo to the dealer. Number of units that can be produced in 38,000 litres = 38,000 litres/8 litres = 4,750 bottles However, the Production capacity of Baby Rose is 7,500 bottles, only 3,500 bottles can be produced. Raw materials used in 3,500 bottles = 8 litres x 3,500 bottles = 28,000 litres Remaining material = 10,000 litres Number of Baby Lily that can be produced in 10,000 litres = 10,000 litres/10 litres = 1,000 bottles Alternatively, Solution can also be presented in following way: Statement showing the Overall contribution and profit of the company Particulars Baby Rose Baby Lily Total () () () Selling price per bottle 600 750 - Less: Direct Materials 160 200 - Other variable costs 270 350 - Contribution per bottle Before additional packaging 170 200 - Contribution per bottle per unit of raw material Before additional packaging 21.25 20 Ranking on the basis of Contribution per bottle per unit of raw material I II Particulars Current Sales (WN2) Additional Sales of Baby Rose (3,500 bottles) Additional Sales of Baby Lily (1,000 bottles) Total () () () () Selling price per bottle - 600 750 - Less: Direct Materials - 160 200 - COST AND MANAGEMENT ACCOUNTING Other variable costs - 270 350 - Additional packaging - 10 10 Contribution per unit - 160 190 - Total Contribution 12,80,000 5,60,000 1,90,000 20,30,000 Less: Fixed Cost 9,50,000 - - 9,50,000 Profit 3,30,000 5,60,000 1,90,000 10,80,000 WN1 Baby Rose Baby Lily Raw Material used per unit of bottle (a) 8 litres ( 160/ 20) 10 litres ( 200/ 20) Current Demand and Sales (b) 4,000 bottles 3,000 bottles Total Raw Material used (c = a x b) 32,000 litres 30,000 litres WN2 Statement showing the current contribution and profit of the company Particulars Baby Rose Baby Lily Total () () () Selling price per bottle 600 750 - Less: Direct Materials 160 200 - Other variable costs 270 350 - Contribution per bottle Before additional packaging 170 200 - Contribution per bottle per unit of raw material Before additional packaging 21.25 20 Total Contribution Before additional packaging 6,80,000 6,00,000 12,80,000 Less: Fixed Cost 5,00,000 4,50,000 9,50,000 Profit 1,80,000 1,50,000 3,30,000 WN3 Raw Material available after current sales = 1,00,000 litres – 62,000 litres = 38,000 litres Since the contribution per unit of Baby Rose is higher than Baby Lily, the company will produce and sale Baby Rose shampoo to the dealer. Number of units that can be produced in 38,000 litres = 38,000 litres/8 litres = 4,750 bottles However, the Production capacity of Baby Rose is 7,500 bottles, only 3,500 bottles can be produced. Raw materials used in 3,500 bottles = 8 litres x 3,500 bottles = 28,000 litres Remaining material = 10,000 litres Number of Baby Lily that can be produced in 10,000 litres = 10,000 litres/10 litres = 1,000 bottles

Detailed Solution & Explanation

Key Concepts to Understand

Depreciation

Acceptance

More Questions from Cost and Management Accounting

Ready to Master Cost and Management Accounting?