CA Intermediate May 2024 Suggested Answers Paper 4 Cost and Management Accounting

FOR CA INTERMEDIATE EXAM PREPARATION

CA Intermediate 2024
Suggested Answers ·
Paper 4 Cost and
Management
Accounting
EXAM YEAR TYPE

CA Intermediate 2024 Suggested Answers
SUBJECT DATE

Paper 4 Cost and Management Accounting May 2024

Notes · Sample Papers · Previous Year Papers · Mock Tests

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PAPER – 4: COST AND MANAGEMENT
ACCOUNTING
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Question No. 1 is compulsory.

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agIn case, any candidate answers extra question(s)/ sub-question(s) over and
Attempt any four questions out of the remaining five questions.

above the required number, then only the requisite number of questions first
answered in the answer book shall be valued and subsequent extra
question(s) answered shall be ignored.
Working notes should form part of the answer.
Question 1

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(a) Tesco cycles Ltd. used about 3,60,000 cycle locks per annum and the usage

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is fairly constant at 30,000 per month. The cycle lock costs ` 240 each at

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wholesale rate and carrying cost is estimated to be 10% of the annual

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average inventory value. The cost to place an order is ` 1200. It takes 45 days

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to receive delivery from the date of order. In order to avoid any kind of
disruption in assembly line, safety stock of 6,500 cycle locks is always
maintained by Tesco Cycles Ltd.
(Assume 360 days in a year).
Compute:
(i) E.O.Q.
(ii) The re-order level.
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(iii) The company has been offered a quantity discount of 2% on the purchase

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of cycle locks provided the order size is 30,000 units at a time. Advise

em (b) A company produces two products, A and B, through laajoint production
whether quantity discount offer can be accepted?

l as process. The total joint production cost incurred is as a
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under:

Material ` 20,000
Labour ` 10,000

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

Variable overheads ` 6,000
Fixed Overheads ` 24,000
Product A and B can be sold for ` 20 per unit and ` 15 per unit respectively
at split off point. The produced quantities are Product A-2,000 units and
Product B – 4,000 units.
(i) You are required to calculate the joint production cost allocation for each
product using the:
(a) Physical unit method.
(b) Contribution margin method.
(ii) Product B can be further processed by incurring expenditure of
` 12,000. Loss in further processing is 2%. It can be sold @ ` 18 per unit.
Explain the impact on profitability if Product B is further processed.
(c) Following data is available for XYZ Ltd. for the month of February 2024:

Standard working hours 8 hours per day of 6 days per week
No. of weeks in the month 4
Maximum capacity 150 employees
Actual working 125 employees
Actual usage of Budgeted Capacity 86%
Ratio
Efficiency Ratio 110%

You are required to calculate the following:
(i) Actual Hours worked.
(ii) Standard Hours for actual output.
(iii) Activity Ratio.
(iv) Standard Capacity Usage Ratio.
Answer
(a) (i) Calculation of Economic Order Quantity

2AO 2 ×3,60,000 units × `1200
EOQ = = = 6,000 units
C `24

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SUGGESTED ANSWER COST AND MANAGEMENT ACCOUNTING

Where,
A = Annual Demand = 3,60,000 units
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O = Ordering cost per order = `1200
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C = Inventory carrying cost per unit per annum = 10% of `240 = ` 24
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s em Level = Safety Stock + Lead Time Consumption l a
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(ii) Re-order

g la = 6,500 + (1,000 x 45) units = 51,500 units
a Or,
Minimum level of cycle locks + [Average rate of consumption ×
Average time required to obtain fresh delivery]
= 6,500 + (1,000 x 45) units = 51,500 units
(iii) Evaluation of Profitability of Different Options of Order Quantity

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(a) When EOQ is ordered (order size of 6,000 units)

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. units ` 240) (`)
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e units/6,000 units)
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Purchase Cost (3,60,000  8,64,00,000
Ordering Cost
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l` 1,200]
[(3,60,000 
72,000

Carrying Costa (6,000 units `240 ½   
72,000
10/100)
Total Cost 8,65,44,000
(b) When Quantity Discount is accepted (order size of 30,000 units)

(`)
Purchase Cost [3,60,000 units  ` 235.2 (240-
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8,46,72,000

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Ordering Cost [(3,60,000 units/30,000 units)
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

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`1,200]
` 235.2 ½la
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las Carrying Cost (30,000 units 

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 

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3,52,800

a
10/100)
Total Cost 8,50,39,200

Advise – The total cost of inventory is lower if discount is accepted.
Hence, the company is advised to accept the quantity discount.

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

(b) Working
Calculation of joint cost

Description Amount (`)
Material 20,000
Labour 10,000
Variable overheads 6,000
Total variable cost 36,000
Fixed overheads 24,000
Total joint cost 60,000

(i) (a) Allocation of joint cost using physical unit method:
Product A = `60,000 × 2,000/6,000 = ` 20,000
Product B = `60,000 × 4,000/6,000 = ` 40,000
(b) Allocation of joint cost using contribution margin method:

Description Product-A Product-B
Units produced 2,000 4,000
Selling price per unit (`) 20 15
A. Sales value (`) 40,000 60,000
B. Allocation of joint
variable cost on the basis
of physical unit
`36,000 × 2,000/6,000 (12,000)
`36,000 × 4,000/6,000 (24,000)
C= A-B Contribution 28,000 36,000
D Allocation of fixed joint
cost on the basis of
contribution margin
`24,000 × 28,000/64,000 (10,500)
`24,000 × 36,000/64,000 (13,500)
C-D Profit at split off point 17,500 22,500

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SUGGESTED ANSWER COST AND MANAGEMENT ACCOUNTING

Allocation of Joint Cost on the basis of Contribution Margin Method:

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Particulars Product A Product B

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Allocation of Variable Cost ` 12,000 ` 24,000

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Allocation of Fixed Cost ` 10,500 ` 13,500

s e Total Joint Cost l a
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` 22,500 ` 37,500

ag (ii) Profitability after further processing of Product B

Description Amount (`)
Units produced and sold 98% of 4,000 units 3,920
Selling price per unit (`) 18
Sales value (`) 70,560

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Joint cost upto split off point (37,500)
Further processing cost
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s after further processing of product
Profit after further processing 21,060

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gthe following manner:
B can also be doneain
Calculation of the profitability

Profitability after further processing of Product B

Description Amount (`)
Incremental revenue on further processing 10,560
(3,920 x `18)- (4,000 x `15)

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Further processing cost (12,000)

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Incremental loss after further processing
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Impact on profitability on Product B
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If Product B is sold at split off point it earns profit of ` 22,500, but after

ag further processing the profit is reduced to ` 21,060/- i.e. an opportunity
loss of ` 1,440/-.

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

(c) (i) Actual Hours worked
Actual working Hours
Actual Usage of Budgeted Capacity Ratio = ×100
Budgeted Hours

86% = (Actual working hours÷ Budgeted hours) × 100
Budgeted hours=125 workers × 8 hours× 6 days × 4 weeks = 24,000
hours
Actual hours= 24,000 × 86% = 20,640 hours

(ii) Standard hours for actual output
Standard Hrs
Efficiency ratio = ×100
Actual Hrs
110% = Standard hours÷ Actual hours
Standard hours= 20,640 × 110% = 22,704 hours
Standard Hrs
(iii) Activity ratio = ×100
Budgeted Hrs

= (22,704 ÷ 24,000) × 100 = 94.6%
(iv) Standard capacity usage ratio
Budgeted Hours
= ×100
Max. possible hours in the budgeted period

= {24,000 hours÷ (150 workers × 8 hours× 6 days × 4 weeks)} × 100

= (24,000 ÷ 28,800) × 100 = 83.33%
Question 2
(a) Luxury Designer Pvt. Ltd. is a manufacturing company, which manufactures
readymade designer shirts. It has four customers: two wholesale category
customers and two retail category customers. It has developed the following
Activity- Based Costing system:

Activity Cost Driver Rate ( `)
Order Processing 1,260 per purchase order
Customer Visits 1,500 per customer visit

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SUGGESTED ANSWER COST AND MANAGEMENT ACCOUNTING

Regular Delivery 30 per delivery Km. travelled

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Expedited Delivery 4,490 per expedited delivery

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List selling price per shirt is ` 1,000 and average cost per shirt is ` 600. CEO

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of Luxury Designer Pvt. Ltd. wants to evaluate the profitability of each of the
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four customers for the year 2023, to explore opportunities for increasing
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profitability of his Company in the next year 2024. The following data in
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context of four customers are available for 2023:

Wholesale Retail
Customers Customers
WC-1 WC-2 RC-1 RC-2
Number of Purchase orders 50 65 224 245
Number of Customer visits 10 13 25 22
Regular Deliveries 46 52 175 198

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Kilometers travelled per delivery 15 10 25
Expedited Deliveries
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Average Number of Shirts persShirt
m 16 50 62

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Average Selling Price pergShirt
215 110 18 15

a ` 700 ` 800 ` 900 ` 950
You are required to:
Calculate the customer-level operating income and operating income as a %
of revenues in 2023 and rank them on the basis of relative profitability.
(b) Star Airlines operates a single aircraft of 180 seats capacity between city 'ND'
and 'GA'. The average normal occupancy is estimated at 70% per flight. The

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average one-way fare is ` 12,500 from city 'ND" to 'GA'. The costs of

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operation of the flight as collected by an expert analyst are:
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. flight
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` 270sper passenger
Fuel cost (Variable) per flight from ‘ND’ to ‘GA’ ` 2,28,000 per

s em Food served on flight from ‘ND’ to ‘GA’
g la
gla (no charge to passenger)
a7.5% of fare
a Commission paid to Travel Agents
(All ticket booking through agents)

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

Fixed costs:
Lease & landing charges per flight ‘ND’ to ‘GA’ ` 9,12,000
Salaries of flight crew per flight ‘ND’ to ‘GA’ ` 90,000
Note: Assume that fuel costs are unaffected by the actual number of
passengers on a flight.
You are required to:
(i) Calculate the net operating income that Star Airlines makes per flight
from 'ND' to 'GA'.
(ii) Star Airlines expects that its occupancy will increase to 144 passengers
per flight if the fare is reduced to ` 11,670. Advise whether this proposal
should be implemented or not.
Answer
(a) Working note:
Computation of revenues (at listed price), discount, cost of goods sold
and customer level operating activities costs:

Wholesale Category Retail Category
Customers Customers
WC-1 WC-2 RC-1 RC-2
Number of shirts 10,750 7,150 4,032 3,675
sold (a) (215x50) (110x65) (18x224) (15x245)
Revenues (at listed
price) (`): (b) 1,07,50,000 71,50,000 40,32,000 36,75,000
{(a) × ` 1,000)}
Discount (`): (c)
{(a) × Discount per 32,25,000 14,30,000 4,03,200 1,83,750
shirt}
Cost of shirts (`) : (d)
64,50,000 42,90,000 24,19,200 22,05,000
{(a) × ` 600}
Order taking costs
63,000 81,900 2,82,240 3,08,700
(`):

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SUGGESTED ANSWER COST AND MANAGEMENT ACCOUNTING

(No. of purchase ×
`1,260)

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Customer visits

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costs (`)

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15,000 19,500 37,500 33,000

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(No. of customer

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visits × ` 1,500)

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ag travel
Delivery vehicles
costs (`)
(Kms travelled by 27,600 23,400 52,500 1,48,500
delivery vehicles ×
` 30 per km.)
Cost of expediting
deliveries (`)
{No. of expedited 22,450 71,840 2,24,500 2,78,380

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deliveries ×
` 4,490}
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Total cost of
customer level

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1,28,050 1,96,640 5,96,740 7,68,580

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operating activities
(`)

Computation of Customer level operating income

Wholesale Category Retail Category
Customers Customers
WC-1 WC-2 RC-1 RC-2

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Revenues

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(At list price)

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1,07,50,000 71,50,000 40,32,000 36,75,000

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(Refer to working

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gla Less: Discount
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a (Refer
note)
to working 32,25,000 14,30,000 4,03,200 1,83,750

Revenue 75,25,000 57,20,000 36,28,800 34,91,250

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

(At actual price)
Less: Cost of shirts
(Refer to working 64,50,000 42,90,000 24,19,200 22,05,000
note)
Gross margin 10,75,000 14,30,000 12,09,600 12,86,250
Less: Customer level
operating activities
costs 1,28,050 1,96,640 5,96,740 7,68,580
(Refer to working
note)
Customer level
9,46,950 12,33,360 6,12,860 5,17,670
operating income
Operating income as
12.584% 21.562% 16.889% 14.828%
a % of revenues
Rank IV I II III

(b) (i) No. of passengers 180 seats  70% = 126

(`) (`)
Fare collection (126 passengers  `12,500) 15,75,000
Variable costs:
Fuel 2,28,000
Food (126 passengers  `270) 34,020
Commission (7.5 % of `15,75,000) 1,18,125 3,80,145
Contribution per flight 11,94,855
Fixed costs:
Lease and Landing Charges 9,12,000
Salaries of flight Crew 90,000 10,02,000
Net income per flight 1,92,855

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SUGGESTED ANSWER COST AND MANAGEMENT ACCOUNTING

(ii)

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Fare collection (144 passengers  `11,670) 16,80,480

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Variable costs:
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. (144 passengers  `270) em
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Fuel 2,28,000

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e Commission (7.5% of `16,80,480) l a
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38,880

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1,26,036 3,92,916
Contribution 12,87,564
Fixed costs:
Lease and Landing Charges 9,12,000
Salaries of flight Crew 90,000 10,02,000
Net income per flight 2,85,564

There is an increase in contribution by ` 92,709. Hence the proposal is

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acceptable.

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e60% capacity and produces 12,000 units of
Question 3

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gl to increase the working capacity either
(a) A factory is currently working at

to 70% or 90% level. It isaestimated that at both the levels, it will be able to
a product. Management is thinking

sell all the produced units. The other details are as under:
• At 70% capacity, the cost of raw materials increases by 4% and the
selling price falls by 3%.
• At 90% capacity, the cost of raw materials increases by 5% and selling
price falls by 4%.

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• At 60% capacity, the product cost is ` 360 per unit and it is sold at ` 400

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per unit.

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• The unit cost of 360 consists of the following:

`la
las Material
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a ` 60
200

ag Labour
Factory overhead ` 60 (50 % fixed)
Administrative & Selling overhead ` 40 (60 % fixed)

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

• Additional advertising cost of ` 20,000 is to be incurred for selling the
product above 80% capacity.
You are required to:
(i) Calculate the profits of the company when the factory works at 60%,
70% and 90% capacity level.
(ii) Offer your comments regarding increase in the capacity based on profit
calculated.
(b) S.K. Manufacturing Co. Ltd. showed a net profit of ` 5,40,400 as per their cost
accounts for the year ended 31.03.2004. However, the financial books
disclosed a net profit of ` 2,60,500 for the same period. The following
information was revealed as a result of scrutiny of the figures of both the sets
of books:
`
Factory overheads under absorbed 84,800
Administrative overheads over absorbed 24,000
Interest paid on bank borrowings 50,000
Interest & Divided received 65,200
Notional rent of own premises charged in cost accounts 60,000
Losses on the sales of fixed assets and investments 48,000
Donations and subscriptions 18,800
Overvaluation of closing stock of finished goods in Cost 1,25,000
accounts
Store adjustments (credited in financial books) 7,500
Depreciation over charged in cost accounts 40,000
Income tax provided 1,50,000

You are required to:
(i) Prepare a reconciliation statement taking net profit as per cost accounts
as base.
(ii) State when is the reconciliation statement of Cost and Financial accounts
not required?

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SUGGESTED ANSWER COST AND MANAGEMENT ACCOUNTING

Answer
(a) (i) Expense Budget at 60%, 70% & 90% level
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60% (12,000 70% (14,000 90% (18,000
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Per Per Per
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Amount Amount Amount

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unit unit unit

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(`) (`) (`)

a Sales (A)
(`) (`) (`)
400 48,00,000 388 54,32,000 384 69,12,000
Variable Costs:
210
Direct Material 200 24,00,000 208 29,12,000
37,80,000
Direct Wages 60 7,20,000 60 8,40,000 60 10,80,000
Variable Factory
30 3,60,000 30 4,20,000 30 5,40,000
Overheads

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Variable
Administrative &
m. 16 2,24,000
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16 1,92,000 16 2,88,000
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Selling
Overheads
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gl 36,72,000 314 43,96,000
Total
Cost (B)
Variable
a306 316 56,88,000

Contribution
94 11,28,000 74 10,36,000 68 12,24,000
(C)=(A–B)
Fixed Costs:
Fixed Factory
-- 3,60,000 -- 3,60,000 -- 3,60,000
Overheads (50%)

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Fixed

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Administrative &
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-- 2,88,000 -- 2,88,000 -- 2,88,000

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Selling

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Overheads (60%)

las Adverting Cost -- -- --
a g 20,000

ag Total Fixed Costs
(D)
-- 6,48,000 -- 6,48,000 -- 6,68,000

Profit (C – D) -- 4,80,000 -- 3,88,000 -- 5,56,000

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

(ii) Comment: Increase of production capacity to 90% is likely to increase
the profit to maximum of ` 5,56,000 due to increase in contribution
while fixed cost is slightly increased due to in advertising cost. At 70%
capacity, profit is reduced to minimum of ` 3,88,00 due to decrease in
selling price by 3% along with increase in raw material cost by 4%
resulting in decrease of contribution. Therefore, it is recommended
that factory should operate at 90% capacity.
(b) (i) Statement of Reconciliation of profit as obtained under Cost and
Financial Accounts

(`) (`)
Profit as per Cost Records 5,40,400
Add: Administrative Overhead over
absorbed 24,000
Interest & Dividend Received 65,200
Notional rent of own premises 60,000
Stores adjustments (credited in
financial books) 7,500
Depreciation over charged in cost
accounts 40,000 1,96,700
7,37,100
Less: Factory overheads under absorbed 84,800
Interest paid on bank borrowings 50,000
Losses on sale of fixed assets and
investments 48,000
Donations and subscriptions 18,800
Over-valuation of closing stock of
finished goods in cost accounts 1,25,000
Income tax 1,50,000 (4,76,600)
Profit as per Financial Records 2,60,500

(ii) Circumstances where reconciliation statement can be avoided:
When the Cost and Financial Accounts are integrated - there is no need

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SUGGESTED ANSWER COST AND MANAGEMENT ACCOUNTING

to have a separate reconciliation statement between the two sets of
accounts. Integration means that the same set of accounts fulfil the

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requirement of both i.e., Cost and Financial Accounts.

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Question 4

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(a) Meta Company Ltd. is engaged in the production of product ‘Trio' which

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passes through two different processes Process P and Process Q. Other

g linformation obtained from books of account for the year is as follows:
a Particulars Process P Process Q
Raw material used 10,000 ---
Raw material cost per unit ` 80 ---
Direct wages ` 52,000 ` 78,000
Direct Expenses ` 8,600 ` 11,100
Selling price per unit of output ` 130 ` 190

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Production overheads of ` 3,00,000 are recovered as percentage of direct

emwas:
wages.

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la 3/4 of the output of Process P was passed
Actual output of the two processes
P-9,200 units and Q-6,400gunits.
a balance was sold. The entire output of process Q
th

on to the Process Q and the
was sold.
Management & Selling expenses during the year were ` 1,70,000.
These are not allocable to the processes.
The normal loss of the two processes, calculated on the input of every process
was:

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The Loss of Process P was sold at ` 5 per unit and that of Q at ` 8. per unit.
Process P- 6% and Process Q-10%

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Assume that Process P and Process Q are not the responsibility centres.

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You are required to prepare:

a (i) Process P Account
(ii) Process Q Account
(iii) Abnormal Loss and Abnormal Gain Account

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

(iv) Costing Profit & Loss Account.
(b) The cost variance report was being discussed at a review meeting where in
Cost Accountant of the company reported under-absorption of production
overheads.
The following information was available from the cost records of the
company at the end of financial year 2023-24:
• Actual production overheads incurred were ` 4,50,000 which included
` 42,000 on account of 'written off obsolete stores.
• 18,000 units were produced during the year out of which 10,000 units
were sold and 8,000 units of finished goods were in stock.
• There were also 5,000 units in progress which may be reckoned as 40%
complete.
• The actual machine hours worked during the period were 43,000.
ABC Ltd. absorbs the production overheads at a predetermined rate of ` 8
per machine hour.
On investigation, it has been found that 20% of the under-absorption of
production overheads was due to defective planning and the rest was
attributable to normal increase in costs of indirect materials and indirect
labour.
You are required to:
(i) Calculate the amount of under-absorption of production overheads
during the year 2023-24; and
(ii) Show the treatment of under-absorption of production overheads in cost
accounts.
Answer
(a) Process- P Account
Particulars Units Amount Particulars Units Amount
(`) (`)
To Material 10,000 8,00,000 By Normal 600 3,000
Loss
To Wages 52,000 By Process Q

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SUGGESTED ANSWER COST AND MANAGEMENT ACCOUNTING

To Direct Exp. 8,600 (9,200 × 3/4) 6,900 7,17,600
To Production 1,20,000 By Costing

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Overheads Profit and Loss

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(3,00,000 × 2/5) (P&L) (9,200 ×

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1/4) 2,300 2,39,200

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By Abnormal

l a Loss 200 20,800

ag 10,000
9,80,600-3,000
9,80,600 10,000 9,80,600

Cost per unit = = ` 104 per unit
10,000-600
Process- Q Account
Particulars Units Amount Particulars Units Amount
(`) (`)
To Process P 6,900 7,17,600 By Normal 690 5,520

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Loss
To Wages
.78,000
To Direct Exp.
s em 11,100 By Costing 6,400 10,11,200

g l a P&L
To Production
Overheads a 180,000

(3,00,000 × 3/5)
To Abnormal Gain 190 30,020
7,090 10,16,720 7,090 10,16,720
9,86,700-5,520
Cost per unit = = `158 per unit
6900-690

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Abnormal Loss Account

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Particulars Units Amount Particulars Units Amount
(`)
s em 1,000 (`)

s em To Process- P 200
By Costing P&Lg
20,800 By Bank
la200

gla a 19,800

a 200 20,800 200 20,800

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

Abnormal Gain Account

Particulars Units Amount Particulars Units Amount
(`) (`)
To Normal Loss 190 1,520 By Process 190 30,020
Q
To Costing Profit and 28,500
Loss
190 30,020 190 30,020

Costing Profit & Loss Account for the year
Dr. Cr.

Particulars Amount Particulars Amount
(`) (`)
To Cost of Sales By Sales
P - 2,39,200 P 2300 @ 130
Q - 10,11,200 12,50,400 Q 6400 @ 190 15,15,000
To Abnormal Loss 19,800 By Abnormal Gain 28,500
To Selling Expense 1,70,000

To Net Profit 1,03,300
15,43,500 15,43,500
(b) (i) Amount of under-absorption of production overheads during the
current year
(`)
Total production overheads actually incurred 4,50,000
during the current year
Less : ‘Written off’ obsolete stores 42,000
Net production overheads actually incurred : (A) 4,08,000
Production overheads absorbed by 43,000 machine
hours@ ` 8 per hour : (B) 3,44,000

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Amount of under – absorption of production overheads :

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[(A) – (B)] 64,000
(ii) Accounting
o m
treatment of under absorption of production
c. o
.c em
overheads
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eproduced, and 5,000 units were 40% complete, 20% of the under- gla s
s
is given in the statement of the question that 18,000 units were

g la absorbed overheads were due to defective planning and the rest werea
a attributable to normal increase in costs of indirect materials and
indirect labour.

1. (20 % of ` 64,000) i.e., ` 12,800 of under-absorbed
overheads were due to defective planning. This ` 12,800
being abnormal, should be debited to the Costing
Profit and Loss A/c.

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2. Balance (80% of ` 64,000) i.e., ` 51,200

. co
of under-absorbed overheads should be ` 51,200

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distributed over work-in-progress, finished goods

a s
and cost of sales by using supplementary rate.
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a g
Total under-absorbed overheads ` 64,000

Apportionment of unabsorbed overheads of ` 51,200 over, work-in progress,
finished goods and cost of sales

Equivalent (`)
Completed Units
Work-in-Progress

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(5,000 units × 40%×` 2.56) 2,000 5,120

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c. o m
(Refer to working note)

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Finished goods
se
la8,000 20,480
las (8,000 units × ` 2.56)
a g
ag Cost of sales
(10,000 units × ` 2,56) 10,000 25,600
20,000 51,200

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

Working Note
51,200
Supplementary rate per unit = = ` 2.56
20,000

Question 5
(a) Super Ltd, a manufacturing company is facing the problem of high labour
turnover in the factory. Before analysing the causes and taking remedial
steps, the management of the company wants to ascertain the profit lost for
the year 2022-23 on account of labour turnover. For this purpose, it has given
you the following information:
(i) Sales for the last year 2022-23 was ` 2,16,80,000 and P/V ratio was 15%.
(ii) The total number of actual hours worked by the direct labour force was
5,00,000 hours. The actual direct labour hours included 60,000 hours
attributable to training new recruits, out of which 40% of the hours were
unproductive.
(iii) Due to delays by the Personnel Department in filling vacancies on
account of labour turnover, 95,000 potential productive hours (excluding
unproductive training hours) were lost.
(iv) 1,500 units of the output produced during training period were defective.
Cost of rectification of defective units was ` 40 per unit.
(v) Settlement cost of the workers leaving the organization was ` 2,37,880.
(vi) Recruitment and Selection cost was ` 1,40,000.
(vii) Cost of Training and Induction was ` 1,61,950.
Assuming that the potential production lost as a consequence of labour
turnover could have been sold at prevailing prices, find the profit lost for the
year 2022-23 on account of labour turnover.
(b) The following information is given by PQR Ltd:

Year Sales (`) Profit (Loss ( `)
2022-23 1,80,00,000 (3,80,000)
2023-24 2,40,00,000 11,20,000

You are required to:
(i) Calculate the Break even sales.

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SUGGESTED ANSWER COST AND MANAGEMENT ACCOUNTING

(ii) In 2024-25, it is estimated that the variable cost will go up by 5% and
fixed cost will reduce by ` 4,80,000. Selling price will remain same.

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Calculate the sales volume to earn a profit of ` 15,00,000.

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(c) Discuss Feedback Control and Feedforward Control system of budgetary

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control.
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Answer
(a) lWorkings:
ag (i) Computation of productive hours
Actual hours worked (given) 5,00,000
Less: Unproductive training hours 24,000
Actual productive hours 4,76,000
(ii) Productive hours lost:

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Loss of potential productive hours+ Unproductive training hours

em
= 95,000 + 24,000 = 1,19,000 hours
(iii) Loss of contribution due sto
Salesvalue gl
a unproductive hours :

= a ×Total unproductive hours
Actual productive hours
` 2,16,80,000
= × 1,19,000 hours= ` 54,20,000
4,76,000 hrs

Contribution lost for 1,19,000 hours= ` 54,20,000 x 15% = `8,13,000

Computation of profit forgone on account of employee turnover

o m(`)
m .c
c. o m
se 2,37,880
Contribution foregone (as calculated above) 8,13,000

em la
Settlement cost due to leaving

las Recruitment and Selection cost
a g 1,40,000

ag Training and Induction costs 1,61,950
Cost of Rectification (1500 units x `40) 60,000
Profit foregone 14,12,830

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

The above question can also be solved in alternative way after
taking proper assumptions
Workings:
(i) Computation of productive hours

Actual hours worked (given) 5,00,000
Less: Unproductive training hours 24,000
Actual productive hours 4,76,000

(ii) Productive hours lost:
Loss of potential productive hours
= 95,000 hours
(iii) Loss of contribution due to unproductive hours :
Salesvalue
= ×Total unproductive hours
Actual productive hours
` 2,16,80,000
= × 95,000 hours = ` 43,26,891
4,76,000 hrs

Contribution lost for 95,000 hours= ` 43,26,891 x 15%
= ` 6,49,034(approx.)
Computation of profit forgone on account of employee
turnover

(`)
Contribution foregone (as calculated above) 6,49,034
Settlement cost due to leaving 2,37,880
Recruitment and Selection cost 1,40,000
Training and Induction costs 1,61,950
Cost of Rectification (1500 units x `40) 60,000
Profit foregone 12,48,864

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Fixed Cost
(b) (i) Break-even sales =
P/V Ratio

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Change in Profit 15,00,000
×100 or, 2,40,00,000-1,80,00,000 ×100
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P/V Ratio =

co
Change in Sales

. em
s
15,00,00

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×100 or, 25%
e a
Or,

s l
60,00,000

l a ag
ag Fixed Cost = Contribution – Profit
= ` 2,40,00,000 × 25% - ` 11,20,000
= ` 60,00,000 – ` 11,20,000 = ` 48,80,000
48,80,000
Break-even sales = = ` 1,95,20,000
25%
(iii) Desired Contribution in 2024-25 = Revised Fixed Cost + Target Profit

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= (` 48,80,000- ` 4,80,000) + ` 15,00,000

em Cost ratio =75%.
= ` 59,00,000
Earlier P/V ratio = 25%. SosVariable

g lasame.
a
Selling price remain the
Variable cost increased by 5% i.e. Variable Cost ratio will be 78.75%
(75+5%of 75).
Now revised P/V ratio=21.25%
59,00,000
Sales Volume in 2024-25= = ` 2,77,64,706(approx.)
21.25%
If it is assumed that variable cost will go up by 5% on total. So, it will
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be increased from 75% to 80% and solution can be done in following
m
c. o m Profit
way:
(i) Desired Contribution in 2024-25 = Revised Fixed Cost +eTarget
em s
la + ` 15,00,000
las a g
= (` 48,80,000-` 4,80,000)

ag = ` 59,00,000
Earlier P/V ratio = 25%. So Variable Cost ratio =75%.
Selling price remain the same.

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

Variable cost increased by 5% i.e. Variable Cost ratio will be 80%
(75%+5%).
Now revised P/V ratio=20%
59,00,000
Sales Volume in 2024-25== = ` 2,95,00,000
20%
(c) There are two types of budgetary control system based on timing of action:
Feedback Control: The feedback system of budgetary control, the actual
results for the budgeted period are collected and compared with the
budgeted figures. The exercise of variance identification is done after the
completion of the budget period. The variances are reported and based on
the report corrective actions are taken, responsibility is fixed and based on
experience, modification in future targets is implemented. As the name
suggests, it is an Ex-post Corrective control system of budget.
This system of budgetary control is common in organistions where
Management Information System (MIS) is not so robust and where data is
obtained only after the finalisation of books of account. Though this type
of control system is less expensive to maintain but has limitations.
Feedforward Control: This the opposite of feedback control system of
budgetary control. It is Ex-Ante Preventive control mechanism of budgetary
control. The budgets are set at the inception of the budgeted period and
the actual results are continuously monitored and compared. The targets
are kept realistic as far as possible and the targets are reviewed and reset
if necessary.
This budgetary control system requires a robust MIS supported by
integrated ERP system enabling an entity to get data as and when desired
basis. This system is very expensive and beneficial for the organisations
where the business environment is dynamic and information has important
role in getting edge in competition and todays data warfare.
Question 6
(a) Distinguish between cost control and cost reduction.
(b) Distinguish between Waste and Scrap. Discuss the treatment of normal and
abnormal scrap in Cost Accounts.

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SUGGESTED ANSWER COST AND MANAGEMENT ACCOUNTING

(c) Describe Unit Costing and Batch Costing. Give three examples of industries
for each method where these are used.

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OR
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(d) Describe briefly idle time and explain the treatment of idle time in cost

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eThe setting up time for the machine in case of Direct Worker Mr. A. g
accounts in following situations:
l a s
a s
l(ii) Normal break time for lunch in case of Indirect Worker Mr. B.
(i)
a
g
a (iii) Time lost due to breakdown of machine in case of Worker Mr. C.
Answer
(a)

Cost Control Cost Reduction

1. Cost control aims at 1. Cost reduction is concerned
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maintaining the costs in with reducing costs. It
.
em
accordance with the challenges all standards and

s
established standards. endeavours to improvise them

l a continuously
2. Cost control seeks gto attain 2. Cost reduction recognises no
a
lowest possible cost under condition as permanent, since a
existing conditions. change will result in lower cost.
3. In case of cost control, 3. In case of cost reduction, it is on
emphasis is on past and present and future.
present
4. Cost control is a preventive 4. Cost reduction is a corrective
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function function. It operates even when

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an efficient cost control system

s e exists.

s em 5. Cost control ends when 5. Cost reduction ahas no visible
gl a continuous
gla targets are achieved. end and is
a
a process.

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

(b) Difference between Waste and Scrap

Waste Scrap
1. The portion of raw material 1. The output which is
which is lost during storage/ discarded and disposed off
production and discarded. without further treatment.
2. It is connected with raw material 2. It is the loss connected with
or inputs to the production the output
process.
3. Waste of materials may be visible 3. Scraps are generally
or invisible. identifiable and has
physical substance.
4. Generally, waste has no 4. Scraps are termed as by-
recoverable value. products and has small
recoverable value.

Treatment of Scrap
Normal- The cost of scrap is borne by good units and income arises on
account of realisable value is deducted from the cost.
Abnormal- The scrap account should be charged with full cost. The credit
is given to the job or process concerned. The profit or loss in the scrap
account, on realisation, will be transferred to the Costing Profit and Loss
Account.
(c) Unit costing is that method of costing where the output produced is
identical and each unit of output requires identical cost. Under this method
costs, are collected and analysed element wise and then total cost per unit
is ascertained by dividing the total cost with the number of units produced.
Such a method of costing is used in the industries like paper, cement, steel
works, mining, breweries etc.
Batch Costing: Batch Costing is a type of specific order costing where
articles are manufactured in predetermined lots, known as batch. Cost per
unit in a batch is ascertained by dividing the total cost of a batch by the
number of units produced in that batch.

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Such a method of costing is used in the case of pharmaceutical or drug
industries, readymade garment industries, industries, manufacturing

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electronic parts of T.V. radio sets etc.

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OR

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(c) The time during which no production is carried-out because the worker

s l
a ag
remains idle but are paid. In other words, it is the difference between the

g ltime paid and the time booked. Idle time can be normal or abnormal.
a Situation Idle Time Treatment
The setting up time for the Normal idle time It is treated as a part of
machine in case of Direct cost of production. It is
Worker Mr. A to be considered while
setting of standard
hours or standard rate.

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Normal rest time, break Normal idle time It is to be considered

c. o
time for lunch in case of for the computation of

em
Indirect Worker Mr. B overhead rate.

s
down of machines in casea time
Time lost due to break- Abnormal
l
idle It is to be shown as a

g
separate item in the
of Worker Mr. C a Costing Profit and Loss
Account.

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gla a
a

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