Table of Contents
Cost and Management Accounting
Topic
Introduction to CMA
Joint and By Product
Process Costing
Variance Analysis Part I
Marginal and Absorption Costing
Test Questions
Page #
01
15
39
77
155
177
 Everybody is allowed to print/sell the book.
 No copyrights.
 Only condition is without any change in Ayats and Ahadiths.
Do not lose hope, nor be sad [Quran 3:139]
COST AND MANAGEMENT ACCOUNTING
Basic concepts
Cost of goods manufactured statement
Rs.
Raw materials
Opening inventory
Purchases
25,000
150,000
175,000
(20,000)
155,000
100,000
255,000
Less: Closing inventory
Raw materials consumed
Manufacturing wages
Prime cost
Factory Overheads
Light and power
Depreciation of production machinery
Depreciation of factory
Rs.
72,000
40,000
50,000_
162,000
417,000
85,000
(95,000)
407,000
Manufacturing costs/Factory cost
Opening work in progress
Closing work in progress
Cost of goods made/Manufactured
The cost of goods made is transferred to the statement of comprehensive income
Statement of Comprehensive income
Rs.
Sales revenue
Less cost of goods sold
Opening inventory of finished goods
Cost of goods made
Closing inventory of finished goods
Cost of sales
Gross profit
Administration costs
Selling and distribution costs
Net profit for the period
Rs.
800,000
50,000
407,000
457,000
(40,000)
86,000
94,000
(417,000)
383,000
(180,000)
203,000
Page 1 of 13
Q:1 XYZ limited manufactures four products. The related data for the year ended Dec31, 2009 is as
follows:
A
Opening stock:
• Units
• Cost
• NRV
Production(units)
Cost of goods produced
Closing stock(units)
Stock valuation method
B
C
D
10,000
15,000
20,000
25,000
70,000
120,000
180,000
310,000
75,000
110,000
180,000
300,000
50,000
60,000
75,000
100,000
400,000
600,000
825,000
1,200,000
5,000
10,000
15,000
24,000
Weighted
Weighted FIFO
FIFO
Average
Average
Required:
Calculate the value of closing stock.
Q:2 Inventory balance of Waqar Corporation at the end of its financial year were as follows:
Finished goods
Work-in-process
Materials
Following transaction occurred during the year
Material purchased
Supplies & indirect material purchase
Direct labour cost
Indirect labour cost
Depreciation-Factory building
Depreciation-office building(50% to sale office and 50%to head office)
Utilities(75%tofactory, 10% to sale office and 15%to head office)
Supplies & indirect material issue
Sale office salaries
Head office salaries
Sales
January
01,2015
100,000
160,000
88,000
December
31,2015
72,000
192,000
120,000
1,200,000
200,000
480,000
240,000
80,000
60,000
200,000
160,000
160,000
96,000
2,920,000
Required:
i.
Cost of goods manufactured statement for the year ended 31 December 2015.
ii.
Income statement for the year ended 31 December 2015.
Page 2 of 13
Life is a journey from Allah to Allah.
Q:3 the following data in respect of New Cool Co. Ltd, manufacturing AIR CONDITIONERS, for the year 2015,
is made available to you:
Rupees
Raw material purchased
2,728,000
Direct labour
825,000
Fuel consumed
1,260,000
Indirect labour
206,800
Custom duty paid on purchase of raw material
532,000
Factory manager’s salary
95,800
H.O building depreciation
20,400
Factory depreciation
442,700
Profit on sale of fixed asset
12,600
Intrest Income
31,500
Raw Material-Opening inventory
168,000
Raw Material-Closing inventory
198,600
Work in Process-Opening inventory
183,000
Work in Process-Closing inventory
104,700
Finished goods opening inventory
228,795
Dividend paid
300,000
Air Conditioner-opening inventory
600 units
Air Conditioner-closing inventory
840 units
Air Conditioner sold during the year 7,760units @ Rs.1,440 per unit
You are required to prepare:
i.
The cost of goods sold statement.
ii.
Unit cost of finished goods inventory (FIFO Basis)
iii.
Gross profit per unit.
A.1
Units
Opening stock
Production(1)
Goods available for sale
(2)
Closing stock(3)
Units sold
A
B
C
D
10,000
50,000
60,000
15,000
60,000
75,000
20,000
75,000
95,000
25,000
100,000
125,000
(5,000)
55,000
(10,000)
65,000
(15,000)
80,000
(24,000)
101,000
70,000
400,000
470,000
110,000
600,000
710,000
180,000
825,000
1,005,000
300,000
1,200,000
1,500,000
39,169
94,667
165,000
288,000
Amount
Opening stock
Production cost (4)
(5)
Calculation of Closing
units:
5/2x3
4/1x3
Page 3 of 13
A.2
Waqar Corporation
Cost of goods sold statement
For the year ended Dec 31,2015
Rs.
Material consumed:
Opening Stock
Purchases
Closing Stock
Direct Labor
Factory Overheads:
Supplies and Indirect material issued
Indirect labor
Depreciation factory building
Utilities (200,000 x 75%)
88,000
1,200,000
(120,000)
Rs.
1,168,000
480,000
160,000
240,000
80,000
150,000
630,000
2,278,000
160,000
(192,000)
2,246,000
100,000
(72,000)
2,274,000
Total Manufacturing Cost
Opening WIP
Closing WIP
Cost of goods manufactured
Opening Finished Goods
Closing Finished Goods
Cost of Goods Sold
Waqar Corporation
Income statement
For the year ended Dec 31,2015
Rs.
2,920,000
(2,274,000)
646,000
210,000
156,000
280,000
Sales
Cost of Sales
Gross Profit
Selling Expenses (Note 1)
Admin Expenses (Note 2)
Profit for the period
Notes:
1) Selling Expenses:
Depreciation (60,000 x 50%)
Utilities (200,000 x 10%)
Sales salaries
2) Admin Expenses:
Depreciation (60,000 x 50%)
Utilities (200,000 x 15%)
Office salaries
30,000
20,000
160,000
210,000
30,000
30,000
96,000
156,000
Page 4 of 13
Do not loose hope, nor be sad [Quran 3:139]
A.3
New Cool Co. LTD
Cost of goods sold statement
Rupees
Direct Material
Raw Material – Opening
Purchases
Custom Duty
Raw Material – Closing
Raw material Consumed
Direct Labor
Prime cost
Factory Overheads
Fuel consumed
Indirect Labor
Manager salary
Factory Depreciation
Factory Cost
Work in progress – Opening
- Closing
Cost of goods Manufactured
Finished Goods – Opening
- Closing
Cost of goods Sold
168,000
2,728,000
532,000
(198,600)
3,229,400
825,000
4,054,400
1,260,000
206,860
95,800
442,700
2,005,300
6,059,700
183,000
(104,700)
6,138,000
228,795
(644,490)
5,722,305
(ii)
Notes:
(ii) Units of finished goods- Inventory (FIFO Basis)
a) Units manufactured during the period.
Sold
In hand (Closing inventory)
Less Opening
Manufactured
b) Unit cost of goods Manufactured
Units
7,760
840
8600
(600)
8000
Manufactuing Cost 6,138,000
=
= Rs . 767.25
Units Manufactured
8,000
Therefore units cost of finished goods inventory in hand on FIFO basis is Rs. 767.25 per unit.
c) Value of closing stock = Rs. 767.25 x 840 = Rs. 644,490
Page 5 of 13
(iii)
Gross Profit per unit (Sold)
Sales per Unit
Cost of sales per unit (5,722,305/7,760)
Gross Profit per unit
Rs
1,440
(737)
703
Ledgers prepared in factory:
b/d
Purchase
Custom Duty
Material
168,000 WIP
2,728,000
532,000 c/d
Cash/Payable
Cash/Payable
Cash/Payable
Payroll
825,000 WIP
206,800 FOH
95,800 FOH
Payroll
Payroll
Fuel
Depreciation
Factory Overhead
206,800
95,000 WIP
1,260,000
442,000
b/d
Material
Payroll
FOH
WIP
183,000 F.G
3,229,400
825,000 c/d
2,005,300
b/d
WIP
Finished Goods
228,795 Cost of sale
6,138,000
c/d
3,229,400
198,600
825,000
206,000
95,800
2,005,300
6,138,000
104,700
5,722,305
644,490
Page 6 of 13
ALLAH makes the impossible possible.
Cost classification by behavior:
Fixed costs
Fixed costs are items of cost that remain the same in total during a time period, no matter how many units are
produced.
Examples of fixed costs include:
❑ The rental cost of a building is Rs.40,000 per month. The rental cost is fixed for a given period: Rs.40,000
per month, or Rs.480,000 per year.
❑ The salary costs of a worker who is paid Rs.11,000 per month. The fixed cost is Rs.11,000 per month or
Rs.132,000 per year.
Note that as activity levels increase the cost remains fixed. However, the cost per unit fall because the cost is
being spread over a great number of units
Variable costs
Variable costs are costs that increase by the same amount, for each additional unit of product that is made.
The variable cost of a cost unit is also called the marginal cost of the unit. The variable cost per unit is often
the same amount for each additional unit of output or unit of activity. This means that total variable costs
increase in direct proportion to the total volume of output or activity.
Examples of variable cost items.
❑ The cost of buying raw material is Rs.500 per litre regardless of purchase quantity. The variable cost is:
• the total cost of buying 1,000 litres is Rs.500,000
• the total cost of buying 2,000 litres would be Rs.1,000,000.
❑ The rate of pay for hourly-paid workers is Rs.150 per hour.
• 400 hours of labour would cost Rs.60,000; and
• 500 hours would cost Rs.75,000.
❑ The time needed to produce an item of product is 4 minutes and labour is paid Rs.150 per hour.
• direct labour is a variable cost and the direct labour cost per unit produced is Rs.10 (= Rs.150 × 4/60).
❑ The cost of telephone calls is Rs.1 per minute.
• The cost of telephone calls lasting 6,000 minutes in total would be Rs.6,000.
Note that as activity levels increase the cost per unit remains fixed. However, total cost increases as more
units are being made
Semi-variable costs
A semi-variable cost, is a cost that is partly fixed and partly variable.
An item of cost that is a mixed cost is an item with a fixed minimum cost per period plus a variable cost for
every unit of activity or output.
Example:
A company uses a photocopier machine under a rental agreement. The photocopier rental cost is Rs.4,000 per
month plus Rs.2 per copy produced. The company makes 15,000 copies during a month:
Total cost is as follows:
Rs.
Fixed cost
4,000
Variable cost (15,000 *Rs. 2)
30,000
Total cost for month
34,000
Example:
The management accountant of a manufacturing company has estimated that production costs in a factory
that manufactures Product Y are fixed costs of Rs.250,000 per month plus variable costs of Rs.30 per unit of
Product Y output. The expected output next month is 120,000 units of Product Y.
Expected total costs are therefore:
Rs.
Variable costs (120,000 × Rs.30)
3,600,000
Fixed costs
250,000
Total costs
3,850,000
Page 7 of 13
Summary of the discussion
A. Fixed cost
In total
Per unit
Constant
Decrease with increase in production
Increase with decrease in production.
B. Variable cost
In total
Per unit
Increase with increase in production
Decrease with decrease in production
Constant
C. Total cost
In total
Per unit
Increase with increase in production
Decrease with decrease in production
Decrease with increase in production
Increase with decrease in production.
Cost estimation: analysing fixed and variable costs
The total costs associated with a business are the sum of the fixed costs and the variable costs. In other words,
the total is semi variable in nature.
Formula:
y = a + bx
Where:
y = total costs in a period
x = the number of units of output or the volume of activity in the period
a = the fixed costs in the period
b = the variable cost per unit of output or unit of activity.
The total cost function can be used to estimate costs associated with different levels of activities. This is very
useful in forecasting and decision making.
There are two methods of constructing the total cost function equation and segerating fixed cost and variable
cost:
❑ High/low analysis
❑ Linear regression analysis.
For example lets assume a business has a following data in previous periods:
Months
Units
Total cost(Rs.)
January
100
300
February
200
400
March
300
500
April
400
600
Required:
Calculate
• Per unit variable cost; and
•
Fixed cost per month.
Page 8 of 13
My ALLAH has always been kind to me. [Quran 19:49]
High/low analysis
High/low analysis can be used to estimate fixed costs and variable costs per unit as follows:
• Take the highest and the lowest activity levels.
• Take the difference of both levels.(the difference between total cost at highest level of activity and the
lowest level of activity is entirely variable because difference in cost is increased because of increase
in production.)
•
•
•
•
Calculate the per unit variable cost as follows:
Difference in cost /difference in activity level
Multiply the per unit variable cost with any selected activity level (either high or low) to get total
variable cost.
Total cost - total variable cost = Total fixed cost
Construct the total cost function i.e. y = a+bx
Example: High/low method
A company has recorded the following costs in the past six months:
Month
Production (units)
Total cost (Rs.)
January
5,800
40,300
February
7,700
47,100
March
8,200
48,700
April
6,100
40,600
May
6,500
44,500
June
7,500
47,100
Required:
a) Construct a total cost function by using high/low method.
b) Estimate the total cost of producing 7,000 units.
I.
Step 1: Identify the highest and lowest activity levels and note the costs associated with each
level.
Production (units)
Total cost (Rs.)
March
8,200
48,700
January
5,800
40,300
Step 2: Compare the different activity levels and associated costs and calculate the variable cost:
Production (units)
Total cost (Rs.)
March
8,200
48,700
January
5,800
40,300
2,400
8,400
Therefore: 2,400 units cost an extra Rs. 8,400.
Therefore: The variable cost per unit = Rs. 8,400/2,400 units = Rs. 3.5 per unit
Step 3: Substitute the variable cost into one of the cost functions (either high or low).
Total cost of 8,200 units:
Fixed cost + Variable cost = Rs. 48,700
Fixed cost + 8,200 *Rs. 3.5 = Rs. 48,700
Fixed cost + Rs. 28,700 = Rs. 48,700
Fixed cost = Rs. 48,700 -Rs. 28,700 = Rs. 20,000
Step 4: Construct total cost function
Total cost = a +bx = 20,000 + 3.5x
Note that at step 3 it does not matter whether the substitution of variable cost isinto the high figures or the
low figures.
Page 9 of 13
Example: Cost of other levels of activity
Returning to step 3 above but this time substituting into the low figures.
Step 3: Substitute the variable cost into one of the cost functions (either high or low).
Total cost of 5,800 units:
Fixed cost + Variable cost = Rs. 40,300
Fixed cost + 5,800 *Rs. 3.5 = Rs. 40,300
Fixed cost + Rs. 20,300 = Rs. 40,300
Fixed cost = Rs. 40,300 -Rs. 20,300 = Rs. 20,000
Once derived, the cost function can be used to estimate the cost associated with
other levels of activity.
II.
The above calculated figures can be used as follows:
The company is planning to make 7,000 units and wishes to estimate the total
costs associated with that level of production.
Total cost = 20,000 + 3.5x
Total cost of 7,000 units = 20,000 + 3.5 *7,000 = Rs. 44,500
COST ESTIMATION: LINEAR REGRESSION ANALYSIS
Linear regression analysis is a statistical technique for segregating the fixed cost for the period and the
variable cost unit. It is alternate to High-Low method.
Linear regression analysis is a better technique than high-low analysis because it is more reliable.
Formula: Regression analysis formula
Given a number of pairs of data a line of best fit (y = a + bx) can be constructed by calculating values for a and
b using the following formulae.
b(variable cost per unit)= n(∑XY) – (∑X)(∑Y)
n(∑X2) – (∑X)2
a(fixed cost)
= (∑y) – b(∑X)
n
n= number of items (pairs of data)
y=total cost
X=activity level(may be units or hours)
b=variable cost per unit
a=fixed cost
Approach
❑ Set out the pairs of data in two columns, with one column for the values of x and the second column for
the associated values of y. (For example, x for output and y for total cost).
❑ Set up a column for x², calculate the square of each value of x and enter the value in the x² column.
❑ Set up a column for xy and for each pair of data multiply x by y and enter the value in the xy column.
❑ Sum each column.
❑ Enter the values into the formulae and solve for b and then a. (It must be in this order as you need b to
find a).
Units(x)
Cost(y)
100
200
300
400
1,000
xy
300
400
500
600
1,800
X2
30,000
80,000
150,000
240,000
500,000
10,000
40,000
90,000
160,000
300,000
b= 4(500,000) – (1000)x(1800)
4(300,000) – (1000)2
b= Rs.1 per unit
Page 10 of 13
Allah is closer to you than your Jugular Vein.
a= (1800) – 1(1000)
4
a= Rs.200 / month
Example: Linear regression analysis
A company has recorded the following output levels and associated costs in the
past six months:
Month
Output (000of units)
Total cost (Rs 000)
January
5.8
40.3
February
7.7
47.1
March
8.2
48.7
April
6.1
40.6
May
6.5
44.5
June
7.5
47.1
Required: Construct the equation of a line of best fit for this data by using linear regression analysis.
Working:
January
February
March
April
May
June
x
y
5.8
40.3
7.7
47.1
8.2
48.7
6.1
40.6
6.5
44.5
7.5
47.1
x= 41.8 y=268.3
x2
33.64
59.29
67.24
37.21
42.25
56.25
x2 =295.88
xy
233.74
362.67
399.34
247.66
289.25
353.2
xy=1885.91
b(variable cost per unit)= n(∑XY) – (∑X)(∑Y)
n(∑X2) – (∑X)2
b= 6(1885.91) – (41.8)(268.3)
6(295.88) – (541.8)
a(fixed cost)
b=3.585
= (∑y) – b(∑X)
n
a=268.3 – 3.585(41.8) a=19.74
6
Y=a+bx
Y=19.74+3.585x
Page 11 of 13
Further practice questions:
Q. The records of direct labour hours and total factory overheads of IMI Limited over first six months of
its operations are given below:
Hours in 000
Total factory
overheads
Rs. in 000
50
80
120
40
100
60
14,800
17,000
23,800
11,900
22,100
16,150
Direct labour
September 2009
October 2009
November 2009
December 2009
January 2010
February 2010
The management is interested in distinguishing between the fixed and variable portion of the overheads.
Required:
Using the least square regression method, estimate the variable cost per direct labour hour and the total
fixed cost per month.
A
September 2009
October 2009
November 2009
December 2009
January 2010
February 2010
Direct labour
Hours (x)
Overheads
(y)
(xy)
(x2)
50
80
120
40
100
60
14,800
17,000
23,800
11,900
22,100
16,150
740,000
1,360,000
2,856,000
476,000
2,210,000
969,000
2,500
6,400
14,400
1,600
450
105,750
8,611,000
10,000
3,600
38,500
n( XY ) − ( X )(  Y )
n(  X 2 ) − (  X ) 2
[6 *8,611,000] − (450)(105,750)
=
6(38,500 − (450) 2
b (var iable Cost =
= 143.1053
a ( Fixed Cost ) =
( Y ) − b( X ) 105,750 −143.1053(450)
=
= 6892
n
6
Page 12 of 13
ALLAH is sufficient for us
Q. Bulbul Limited (BL) produces a specialized product for industrial customers. Following are
the details of BL’s monthly production and associated cost for the past six months:
Months
Units
Cost (Rs. ‘000)
March
75
900
April
60
700
May
65
850
June
80
950
July
105
1,200
August
95
1,040
Required:
Using the least square method, calculate the estimated cost to produce 110 units. (09 marks)
Units (x)
March 2011
April 2011
May 2011
June 2011
July 2011
August 2011
CostRs.000' (y)
(x2)
(xy)
75
60
65
80
105
95
900
700
850
950
1,200
1,040
67,500
42,000
55,250
76,000
126,000
98,800
5,625
3,600
4,225
6,400
11,025
9,025
480
5,640
465,550
39,900
n( XY ) − ( X )(  Y )
n(  X 2 ) − (  X ) 2
[6 *465,550] − (480)(5,640)
=
6(39,900) − (480) 2
b (var iable Cost =
= 9.57/Unit
a ( Fixed Cost ) =
( Y ) − b( X ) 5640 − 9.57(480)
=
= 176
n
6
Estimated cost to produce 110 units should be:
= 176 + 9.57 x 110
= 1,229
Page 13 of 13
Do start with BISMILLAH!
Joint & By Product cost
Diesel
Crude Oil
Process
Petrol
Further Process
Hi-octane
Grease
In some process manufacturing system, two or more different products are produced from a common
manufacturing process.
Manufacturing Process
Joint product
(Significant value products)
These are two or more products generated
Simultaneously by a single manufacturing process
using common input and being substantially
equal in value . Each joint product has a substantial
sale value relative to each other.
By-product
(Insignificant value products)
By-products are outputs from a joint process
that are relatively minor in quantity and/or
value.
Joint Product Cost or Common Processing Costs
These are those costs which arise from common processing or manufacturing of products produced from common
raw materials. A joint cost is incurred prior to the point at which separately identifiable products emerge from the
same process.
In order to calculate cost of each of joint product, these common costs must be shared (apportioned) between the
joint products.
Methods of Allocation of Joint Costs to Joint Products
1. Physical quantity or units basis
2. Sale value at split off basis
3. NRV basis (sales value at split off point less selling expenses if any)
*Split off point means a point where separately identifiable products emerge from a common process.
1. Unit basis (Also known as physical QUANTITY method)
In this method total joint production cost is to be apportioned on the basis of physical units of
production e.g
 Assume joint processing cost is Rs 120,000
Products
A
Units
20,000
B
C
Total
25,000
15,000
60,000
Allocation
40,000
{(20,000÷60,000)×120,000}
50,000
30,000
120,000
Page 1 of 24
2. Sale-value ta split-off point
This method enjoys great popularity because of the argument that market value of any product reflects
the cost incurred in its production, means that if a product sells for more than another it is because
more cost was expended to produce it. To apply the method we need to have number of units produced
and their market or sale values at split off point e.g
 Assume that joint processing costs are Rs 10,000.
Products
Units Produced Sale Price/Unit
A
1,000
2
Market Value
2,000
B
2,000
3
6,000
C
3,000
4
12,000
20,000
Allocation
1,000
{(2,000÷20,000)×10,000}
3,000
(6,000/20,000x10,000)
6,000
(12,000/20,000x10,000)
10,000
Some products are not saleable at the split off point and therefore without any market value; require
additional processing to place them in marketable condition. In such cases, the basis of allocation of the
joint production cost is a hypothetical market value at the split off point.
To arrive at the basis for apportionment, it is necessary to use a working back procedure whereby the
after split off processing cost is subtracted from the ultimate sales value to find a hypothetical market
value at split off point e.g:
 Assume that joint processing costs are Rs 13,200
Market value
Cost after split off
after further
(Further processing
processing
cost)
A
2,000
500
Hypothetical
Market value at
split off
1,500
B
6,000
1,000
5,000
C
12,000
2,000
10,000
20,000
Finally total processing cost is:
16,500
Allocation of Joint cost
1,200
{(1,500÷16,500) ×13,200}
4,000
{(5,000÷16,500) ×13,200}
8,000
{(10,000÷16,500)×13,200}
13,200
A
Rs.1,700 (500+1,200)
B
Rs.5,000 (1,000+4,000)
C
Rs.10,000 (2,000+8,000)
In the given situation, certain of joint products may be saleable at the split off point while others are
not, the market values at the split off point would be used for former group while for the latter group
hypothetical market values would values would be used.
Page 2 of 24
Indeed, help of ALLAH is near. [2:214]
Treatment Of By Product
Cost is not allocated to by product. Instead its sale proceeds (if any) are accounted for by using any of
the following methods.
1. As revenue
Cash/Receivable
***
Revenue
***
2. As other income
Cash/Receivable
***
Other Income
***
3. As a deduction from joint process cost
Cash/Receivable
***
Joint process cost
***
The expected sale proceeds of by-product are deducted from the joint processing costs. After this
deduction, net joint processing costs are apportioned among the joint products.
Note: if the question is silent then use 3rd method as given above.
Example: By-product and joint products
Two joint products XX and YY, are produced from a common process.
During July, 11,000 units of materials were input to the process. Total costs of processing (direct
materials and conversion costs) were Rs 100,000.
Output was 6,000 units of XX and 4,000 units of YY and 1,000 units of by-product Q.
XX has a sales value of Rs. 24 per unit when it is output from the process.
YY has a sales value of Rs. 12 per unit when it is output from the process.
Q has a sales value of Rs.1 per unit
The company’s policy is to apportion joint costs based on sales value at the point of split off.
80% of the output of both XX and YY was sold by the month end.
The proceeds of sale of the by-product could be treated in one of the following ways.
a) As a separate revenue; or
b) As other income; or
c) As deduction from joint production cost
Required:
Prepare an income statement for the month of July assuming each of the above treatment for byproducts separately.
Solution
a) Proceeds from sale of by-product are treated as a separate
revenue
Income statement
Revenue:
Sales of XX (80% x 6,000 units x Rs. 24)
Sales of YY (80% x 4,000 units x Rs. 12)
By-product
Rs.
115,200
38,400
1,000
154,600
Page 3 of 24
Cost of sales:
100,000
(20,000)
Production costs
Less: Closing inventory (W-1)
Gross profit
Allocation of Joint cost
Sales value
XX (6,000 units x Rs. 24)
YY (4,000 units x Rs. 12)
(80,000)
74,600
Rs.
Rs.
144,000
48,000
192,000
XX: Rs. 144,000/ Rs. 192,000 x Rs.100,000
YY: Rs. 48,000/ Rs. 192,000 x Rs.100,000
75,000
25,000
100,000
W-1 Valuation of Closing Stock
XX
75,000/6,000 x 1,200 =
YY
25,000/4,000 x 800 =
15,000
5,000
20,000
b) Proceeds of sale of the by-product are treated as other income
Income statement
Revenue:
Sales of XX (80% x 6,000 units x Rs. 24)
Sales of YY (80% x 4,000 units x Rs. 12)
Rs.
115,200
38,400
153,600
Cost of sales:
Production costs
Less: Closing inventory (W-1)
100,000
(20,000)
Gross profit
Other income
Profit
(80,000)
73,600
1,000
74,600
Allocation of Joint cost
Sales value
XX (6,000 units x Rs. 24)
YY (4,000 units x Rs. 12)
Rs.
144,000
48,000
192,000
XX: Rs. 144,000/ Rs. 192,000 x Rs 100,000
YY: Rs. 48,000/ Rs. 192,000 x Rs 100,000
W-1 Valuation of Closing Stock
XX
75,000/6,000 x 1,200
YY
25,000/4,000 x 800
Rs.
75,000
25,000
100,000
15,000
5,000
20,000
Page 4 of 24
Life is journey from ALLAH to ALLAH
c)Proceeds of sale of the by-product are deducted from the joint process cost
Income statement
Rs.
Revenue:
Sales of XX (80% x 6,000 units x Rs. 24)
115,200
Sales of YY (80% x 4,000 units x Rs. 12)
38,400
153,600
Cost of sales:
Production costs (100,000-1,000)
99,000
Less: Closing inventory (W-1)
(19,800)
(79,200)
Profit
74,400
Allocation of Joint cost
Sales value
XX (6,000 units x Rs. 24)
YY (4,000 units x Rs. 12)
Rs.
144,000
48,000
192,000
XX: Rs. 144,000/ Rs. 192,000 x (Rs 100,000 - Rs. 1,000)
YY: Rs. 48,000/ Rs. 192,000 x (Rs 100,000 - Rs. 1,000)
W-1 Valuation of Closing Stock
XX
74250/6,000 x 1,200
YY
24,750/4,000 x 800
Rs.
74,250
24,750
99,000
14,850
4,950
19,800
The profit in the (a) and (b) is higher than the profit in (c) by Rs. 200 because of higher value of closing
stock.
Q.1
The CBA Company produces three joint products. C, B and A. During February, the following information
was recorded:
C
B
A
Total
Joint materials
—
—
—
Rs 5,000
Joint processing
—
—
—
Rs 23,000
Separate processing
Rs 8,000
Rs 5,000 Rs 2,000 Rs 15,000
costs
Output in kilograms
2 000 kg
5 000 kg 3 000 kg 10,000 kg
Sales in kilograms
1 500 kg
4 200 kg 2 400 kg
8,100 kg
Sales price per kilogram
Rs 10
Rs 6
Rs 7
—
Required:
Total cost for each product, using the market value method (means sale value method).
Note: Even if it is not mentioned in market value method, always use sale value at split-off point
method.
Page 5 of 24
Q.2
M Company buys Zeon for processing. At the end of processing in Department 1, Zeon splits off into
Products A, B, and C. A is sold at the split-off point with no further processing; B and C require further
processing before they can be sold; B is processed in Department 2; and C is processed in Department 3.
The following is a summary of costs and other related data for the year ended June 30, 2015:
Department
1
2
3
Rupees
Cost of Zeon
96,000
Direct labor
14,000
45,000
65,000
Factory overhead
10,000
21,000
49,000
Products
A
B
C
Units sold
20,000
30,000
45,000
Units on hand at June 30, 2015
10,000
15,000
Sales (in Rupees)
30,000
96,000
141,750
There were no inventories on hand at July 1, 2014 and there was no Zeon on hand at June 30, 2015. All
units on hand at June 30 2015, were complete as to processing. M company uses the market value at
split-off point to allocate joint cost.
Required:
(1)
The market value at the split-off point for Product A’s total units produced for the year.
(2)
The total joint cost for the year ended June 30, 2015, to be allocated.
(3)
The cost of Product B sold for the year ended June 30, 2015.
(4)
The cost assigned to the Product A ending inventory.
(5)
The cost assigned to the Product C ending inventory.
Diagram missing
Discussion of FIFO & weighted Average:
Example:
FIFO / Weighted Average:
Opening Stock
Add: cost of goods manufactured
Less: Closing Stock
Cost of sales
Units
-50,000
(10,000)
40,000
Amount
-1,000,000
(200,000)
800,000
FIFO:
Opening Stock
Add: cost of goods manufactured
Less: Closing Stock
Cost of sales
Units
5,000
50,000
(10,000)
45,000
Amount
90,000
1,000,000
(200,000)*
890,000
*[1,000,000 / 50,000) x 10,000
Page 6 of 24
There is no might nor power except in ALLAH.
Weighted Average:
Opening Stock
Add: cost of goods manufactured
Less: Closing Stock
Cost of sales
Units
5,000
50,000
(10,000)
45,000
Amount
90,000
1,000,000
(198,182)*
891,818
*working:
=
90,000 + 1,000,000
5,000 + 50,000
= 19.8182 × 10,000
= 198,182
Conclusion:
Answer of FIFO and weighted Average will be different only when there is opening stock.
Q.3
Binary Limited manufactures three joint products viz. Aay, Bee and Cee in one common
process. Following this process, product Aay and Bee are sold immediately while product Cee is
subjected to further processing. Following information is available for the period ended June 30, 2007:
1.
Aay
Bee
Cee
Opening stock in kg
Nil
Nil
Nil
Production in kg
335,000
295,000
134,000
Sales in kg
285,000
212,000
Sales price per kg (Rs.)
30.85
40.38
2. Total costs of production were Rs 17,915,800.
3. 128,000 kg of Cee were further processed during the period and converted into 96,000 kg of
Zee. The additional costs of further processing were as follows:
Direct labor
Production overhead
Rs. 558,500
Rs. 244,700
4. 94,000 kg of Zee was sold during the period, with total revenue of Rs. 3,003,300. Opening stock
of Zee was 8,000 kg, valued at Rs 172,800. FIFO method is used for pricing transfers of Zee to
cost of sales.
5. 8,000 kg of a bye-product Vee was also produced during further processing and sold @ Rs. 10
per kg. Sales proceeds of bye-product are adjusted against production cost of product
Zee.(treatment of by-product).
6. The cost of production is apportioned among Aay, Bee and Cee on the basis of weight of output
(means physical units basis).
7. Selling and administration costs of Rs. 2,500,000 were incurred during the period. These are
allocated to all the main products based on sales value.
Required:
Prepare a profit and loss account for the period, identifying separately the profitability of each of the
three main products.
(19 Marks)[Autumn 2007]
Note: If nothing is mentioned in question then assume that any loss is normal loss.
Also solve the same question by weighted average.
Diagram missing
Page 7 of 24
Treatment of Losses


Normal Loss
Abnormal Loss
(Expected loss that is uncontrollable)
(Unexpected loss)
E.g 1000 units of raw material are imported @ 500 per unit = Rs 500,000.
Suppose it is expected that 50 units of raw material will be of no use (means normal loss).
No cost is allocated to normal loss, cost of normal loss units is absorbed by remaining units.
Therefore simply per unit cost of remaining units will be
500,000 = 526.31/unit
950
If normal loss has recovery value then; (let’s assume 50 units can be sold @ 100/unit as scrap)
500,000-5,000 = 521.05/unit
950
Abnormal Loss:
Suppose 50 units are abnormal loss instead of normal loss (means suppose loss was not expected). Cost
is allocated to abnormal loss units just like good units. Therefore:
500,000 = 500/unit
1,000
50 x 500 = 25,000 will be recognized as abnormal loss in income statement. If it has some recovery value
then it is adjusted against cost of abnormal loss.
Normal & Abnormal loss (both):
Suppose instead of 50 units loss which was expected, actual loss is 60 units;
Then:
500,000 = 526.31/unit
950
10 x 526.31 = 5,263 is considered as an abnormal loss (recognized in income statement)
If it has some recovery value than it is adjusted against cost of abnormal loss.
Q.4
Platinum Limited (PL) manufactures two joint products Alpha and Beta and a by-product
Zeta from a single production process. Following information is available from PL’s records for the
month of February 2012:
Direct material
Direct labor @ Rs. 15 per hour
Normal process loss
25,000 kg. @ Rs. 25 per kg.
Rs. 432,000
20% of the material consumed
Overheads are allocated to the products at the rate of Rs. 10 per direct labour hour. The normal loss is
sold as scrap at the rate of Rs. 8 per kg.
Following data relates to the output from the process:
Product
Alpha
Beta
Zeta
Output
ratio
75%
15%
10%
Selling price per kg.
(Rs.)
95.0
175.0
52.5
Page 8 of 24
Remember success calls you five times a day.
Alpha is further processed at a cost of Rs. 30 per unit, before being sold in the market. Joint costs are
allocated on the basis of net realizable value (sale value at split off point less selling expenses (if any)).
Required:
Compute the total joint manufacturing costs for February 2012. Also calculate the profit per kg for Alpha
and Beta.
(10 marks)
Note: treatment of normal loss is like by-product (i.e deduct the sale proceeds from cost of production).
No cost is allocated to normal loss.
Diagram missing
Q.5
Colon Limited (CL) manufactures two joint products Pollen and Stigma in the ratio of 65:35.
The company has two production departments A and B. Pollen can either be sold at split off point or can
further be processed at department-B and sold as a new product Seeds. Stigma is sold without further
processing. Following information relating to the three products is available from CL’s records:
Pollen
Stigma
Seeds
---------------Rupees--------------Sales price per kg
90
300
125
Total selling expenses
135,000
306,000
180,000
Following further information relating to the two departments is available:
Department A
Department B
Material X
75,000 kg at Rs. 60 per kg Material Y
12,000 kg at Rs. 25 per kg
Labor @ Rs. 150 per hour
12,000 hours
3,600 hours
Variable overheads
Rs. 125 per labor hour
Rs. 65 per labor hour
Fixed overheads
Rs. 100 per labor hour
Rs. 50 per labor hour
Material input output ratio 100:88
100:96
Material is added at the beginning of the process. Joint costs are allocated on the basis of net realizable
value at split off point (sale value at split-off point less selling expenses).
Required:
a) Calculate the joint costs and apportion them to the two products.
(10 Marks)
b) Advise CL whether it should produce Seeds or sell Pollen without further processing. (6 Marks)
Note:
1) If nothing is mentioned then assume that loss is normal.
2) If no information of stocks then assume stocks are nil.
Q.6
Binary Ltd. (BL) manufactures three products, A, B and C. It is the policy of the company to
apportion the joint costs on the basis of estimated sales value at split off point. BL incurred the following
joint costs during the month of August 2008:
Direct material
Direct labor
Overheads (including depreciation)
Total joint costs
Rs. in ‘000
16,000
3,200
2,200
21,400
During the month of August 2008 the production and sales of Product A, B and C were 12,000, 16,000
and 20,000 units respectively. Their average selling prices were Rs. 1,200, Rs. 1,400 and Rs 1,850 per
unit respectively.
Page 9 of 24
In August 2008, processing costs incurred on Product A after the split off point amounted to
Rs 1,900,000.
Product B and C are sold after being packed on a specialized machine. The packing material costs Rs. 40
per square foot and each unit requires the following:
Product
B
C
Square feet
4.00
7.50
The monthly operating costs associated with the packing machine are as follows:
Depreciation
Labor
Other costs
Rupees
480,000
720,000
660,000
All the above costs are fixed and are apportioned on the basis of packing material consumption in
square feet.
Required:
a) Calculate the joint costs to be apportioned to each product.
(13 Marks)
b) BL has received an offer from another company to purchase the total output of Product B
without packaging, at Rs. 1,200 per unit. Determine the viability of this offer. (03Marks)
Note: Always remember if production is equal to sales then there is no of finished stock.
Q.7
J Ltd. manufactures two products Orange and Mango by processing a raw material in Department 1.
Orange is then further processed in Department 2 with no loss. Mango is further processed in
department 3. By-product Leaf is also produced in department 3 which can be sold in the market.
It is estimated that after processing in Department 1, 55% of the raw material is converted into
processed Orange and 40% into processed Mango. No product is in a saleable condition at this stage.
The selling price of Orange is Rs 45 per kilo and Mango is Rs 64 per kilo. Leaf can be sold at Rs. 12 per
kilo.
It is estimated that in department 3, 10% of all input becomes leaf and 88% becomes Mango.
During the month of January 198,000 kilos of Orange were produced.
It is company policy to subtract revenue of by products from total costs of the departments in which
they are produced. Joint costs are allocated on the basis of hypothetical market value at split-off point.
Labour
Overheads
Department 1
1,060,000
795,000
Department 2
720,000
540,000
Department 3
880,000
660,000
Raw material consumed per unit started is Rs. 32 per kilo.
Required:
a) Calculate the product wise and total profit for the month of January assuming all output is sold.
b) Assume Finished Goods of Orange and Mango is left in stock prepare product wise and in total
income statement for the month of January.
Suppose Stock Left is:
•
•
Orange = 9,800 kgs.
Mango = 5,500 kgs.
Page 10 of 24
ALLAH has already planned your life, if something goes wrong, it went wrong for a reason
Further scenarios in question No. 3:
(a)
Binary Limited
Assuming that 100% loss of Cee while further processing in to Zee is abnormal less identified at
the end offurther processing)
It means 24,000 kg. of Cee was abnormal loss as follows:
A
96,000
B
8,000 by Product
C 134,000
Zee
24,000 Kgs (bal)
(6,000)
128,000
Aay
8,792,250
Income statement
Bee
Zee
8,560,560
3,003,300
Total
20,356,110
-7,855,750
-6,917,750
172,800
2,979,840 (W-1)
172,800
17,753,340
Gross Profit
(1,172,500)
(6,683,250)
2,109,000
(1,946,350)
(4,971,400)
3,589,160
(310,400) (W-2)
(2,842,240)
161,060
(3,429,250)
(14,496,890)
5,857,220
Selling & Admin
Abnormal Loss
Profit/ (loss)
(1,079,805)
-1,029,195
(1,051,350)
-2,537,810
(368,845)
(744,960)
(952,745)*
(2,500,000)
(744,960)
2,612,260
Sales
Cost of sales
Opening Stock
Cost
of
manufactured
Closing Stock
goods
*Loss is increased by 77,600 because value of closing stock of Zee is decreased by 77,600
(388,000 – 310,400)
WORKINGS:
W-1
Cost of goods manufactured of Zee
Raw Material: (Cee)
Opening
COGM
Closing
Direct Labor
Factory overheads
Total Manufacturing Cost
Recovery Value of by product
Net manufacturing cost
Less: Cost of Abnormal less
3,724,800
 24,000 =
120,000
Net Manufacturing cost of Zee
-3,142,300
(140,700)
3,001,600
558,500
244,700
3,804,800
(80,000)
3,724,800
(Cost of 134,000 kgs)
(Cost of 6,000 kgs)
(Cost of 128,000 kgs)
(Cost of 128,000 kgs)
(Recovery value of 8,000 kgs)
(Net cost of 120,000 kgs)
(744,960)
(Cost of 24,000 kgs)
2,979,840
(Cost of 96,000 kgs)
Page 11 of 24
W-2
Calculation of Closing Stock of Zee (FIFO)
2,979,840 ÷ 96,000 × 10,000 = 310,400
(b)
Binary Limited
Assuming that loss of Cee while further processing into Zee is normal upto 10% of input while
balance is abnormal loss which is identified after further processing.
96,000 kg (Zee Given)
8,000 kg (by product Given)
Aay
Bee
Cee
12,800 Kgs (normal loss, 10%)
11,200 Kgs (bal. abnormal loss)
134,000
(6,000)
128,000
Aay
8,792,250
Income statement
Bee
Zee
8,560,560
3,003,300
Total
20,356,110
-7,855,750
-6,917,750
172,800
3,335,642
172,800
18,109,142
Gross Profit
(1,172,500)
(6,683,250)
2,109,000
(1,946,350)
(4,971,400)
3,589,160
(347,463)
(3,160,979)
(157,679)
(3,466,313)
(14,815,629)
5,540,481
Selling & Admin
Abnormal Loss
Profit/ (loss)
(1,079,805)
-1,029,195
(1,051,350)
-2,537,810
(368,845)
(389,158)
(915,682)
(2,500,000)
(389,158)
2,651,323
Sales
Cost of sales
Opening Stock
Cost
of
manufactured
Closing Stock
goods
Loss is increased by 40,537 because value of closing stock of Zee is decreased by 40,537
(388,000 – 347,463).
WORKINGS:
W-1
Cost of goods manufactured of Zee
Raw Material: (Cee)
Opening
Cost of goods manufactured
Closing
Direct Labor
Factory overheads
Total Manufacturing Cost
Less: Recovery Value of by
product
Net manufacturing cost
-3,142,300
(140,700)
3,001,600
558,500
244,700
3,804,800
(80,000)
3,724,800
(Cost of 134,000 kgs)
(Cost of 6,000 kgs)
(Cost of 128,000 kgs)
(Cost of 128,000 kgs)
(Recovery value of 8,000 kgs)
(Net cost of 120,000 kgs
but because of normal loss of
12,800 kg it is now cost of
107,200 kg)
Less: Cost of Abnormal less
Page 12 of 24
ALLAH loves those who fears him. [3:76]
3,724,800
 11,200 =
107,200
Net Manufacturing cost of Zee
W-2
(389,158)
(Cost of 11,200 kgs)
3,335,642
(Cost of 96,000 kgs)
Calculation of Closing Stock of Zee
FIFO:
3,335,642
 10,000 = 347,463
96,000
Page 13 of 24
Solutions:
A.1
Product
Ultimate Market
Value per unit
Units
Produced
Ultimate
Market
Value
Separable
Processing
Costs
Hypothetical
Market
Value
Joint Cost
Allocation
Total Cost
C
10
2,000
20,000
8,000
12,000
6,000*
14,000
B
6
5,000
30,000
5,000
25,000
12,500
17,500
A
7
30,000
21,000
2,000
19,000
9,500
11,500
71,000
15,000
56,000
28,000**
43,000
Joint Cost
Allocation
Total Cost
36,000
36,000
Total
*12,000/56,000 x 28,000 = 6,000
**5,000+23,000=28,000
A.2
1)
30,000 ___ = 1.50 per unit
20,000
1.50 x 30,000(20,000 + 10,000) = 45,000 market value of production at split-off point for Product A.
2)
Department
Cost of Zeon
Direct labor
Factory Overhead
Total Joint cost
96,000
14,000
10,000
120,000
3)
Product
Ultimate Market
Value per unit
Units
Produced
Ultimate
Market
Value
Separable
Processing
Costs
Hypothetical
Market
Value
A
1.50
30,000
45,000
-
45,000
(45,000/150,000
x120,000)
B
3.20*
30,000
96,000
66,000
30,000
24,000
90,000
75,000
60,000
174,000
120,000
300,000
(45,000+21,000)
C
3.15**
60,000
189,000
114,000
(65,000+49,000)
Total
330,000
180,000
150,000
*96,000/30,000 = 3.2
**141,750/45,000 = 3.15
Conclusion:
Cost of Product B sold for the year ended June 30, 2015 is 90,000.
4)
36,000
= 1.20 per unit
30,000
1.20 x 10,000 units in ending inventory = 12,000 cost assigned to Product A ending inventory.
5)
114,000 + 60,000
= 2.90 per unit
60,000
2.90 x 15,000 units in ending inventory = 43,500 cost assigned to Product C ending inventory.
Page 14 of 24
Insulting others is never a way of correcting them.
A.3
Binary Limited
Income Statement
For year ended 30-6-2007
Sale
Less: Cost of sales
Opening Cost
Joint Production cost (W-1)
Closing Stock (W-2)
Additional further processing costs
(558,500+244,700)
Total Production cost
Less Recovery value by-product
Net Total Manufacturing Cost
Opening stock
Aay
8,792,250
(285,000 x 30.85)
Bee
8,560,560
(212,000x40.38)
Zee
3,003,300
(Given)
Total
20,356,110
7,855,750
(1,172,500)
6,683,250
6,917,750
(1,946,350)
4,971,400
3,142,300
(140,700)
3,001,600
803,200
17,915,800
(3,259,550)
14,656,250
803,200
6,683,250
4,971,400
15,459,450
6,683,250
-
4,971,400
-
3,804,800
(80,000)
(8,000 x 10)
3,724,800
172,800
(Given)
(388,000)
3,509,600
(506,300)
(368,845)
(875,145)
Closing Stock (W-3)
Cost of sales
6,683,250
4,971,400
Gross Profit
2,109,000
3,589,160
Less: Selling and Distribution (W-4)
(1,079,805)
(1,051,350)
Net Profit
1,029,195
2,537,810
Working
W-1 Calculation of joint product cost (on the basis of weight of output)
Aay
Bee
Cee
Production (kg)
335,000
295,000
134,000
Allocation of cost
7,855,750
6,917,750
3,142,300
(335,000/764,000
(295,000/764,000
(134,000/764,000
x17,915,800)
x17,915,800)
x17,915,800)
15,379,450
172,800
(388,000)
15,164,250
5,191,860
(2,500,000)
2,691,860
Total
764,000
17,915,800
(Given)
W-2
Cost of Closing Stock
Aay = 7,858,750/335,000 x 50,000 = 1,172,500
Bee = 6,917,750/295,000 x 83,000 = 1,946,350
Cee = 3,142,300/134,000 x 6,000 = 140,700
Units of Closing Stock
Aay=335,000-285,000=50,000
Bee=295,000-212,000=83,000
Cee=134,000-128,000=6,000
W-3
Closing Stock of Zee (By using FIFO)
=3,724,800/96,000 x 10,000 = 388,000
Page 15 of 24
If weighted average then:
172,800 + 3,724,800 x 10,000 = 374,769
8, 000 + 96,000
W-4 Selling and Distribution Expenses (based on sales)
Aay = 8,792,250/20,356,110 x 2,500,000 = 1,079,805
Bee = 8,560,560/20,356,110 x 2,500,000 = 1,051,350
Zee = 3,003,300/20,356,110 x 2,500,000 = 368,845
A.4
PLATINUM LIMITED
(i)
Total cost of output:
Direct material [25,000 x 25]
Direct Labour
Overheads [ 432,000 / Rs. 15 x Rs. 10]
(ii)
Kg.
25,000
Rupees
625,000
432,000
288,000
Less: Sale of normal loss units [ 25,000 x 20% x Rs. 8]
(5,000)
1,345,000
(40,000)
Total cost of production
20,000
1,305,000
Profit per kg of Alpha and Beta:
Rupees
Joint costs of production
Less: Sale of Zeta [20,000 x 10% x Rs. 52.5]
1,305,000
(105,000)
Net Joint cost of production
1,200,000
Product
Kg
output %
NRV at split off point Total NRV Joint cost allocation
Alpha
15,000
75%
65
(95-30)
975,000
Beta
3,000
15%
175
525,000
780,000
(975,000/1,500,000
x1,200,000)
420,000
1,500,000
1,200,000
18,000
Total
Revenue
Joint cost
A
15,000x95
1,425,000
780,000
B
3,000x175
525,000
420,000
Further
processing
cost
45,000
(15,000x30)
-
Total cost
Profit
1,230,000
195,000
420,000
105,000
Profit/kg
13
(195,000/15,000)
35
(105,000/3,000)
Page 16 of 24
Man gets and forgets, ALLAH gives and forgives.
A.5
(a) Calculation of Joint costs:
Dept. A
Rupees in ‘000
4,500
1,800
1,500
1,200
9,000
Material X [75,000 × Rs. 60]
Labor [12,000 × Rs. 150]
Variable overheads [12,000 × Rs. 125]
Fixed overheads [12,000 × Rs. 100]
Total cost
Apportionment of joint costs:
Input of material X in dept. A
Yield (88% of input material X)
Ratio of output for Pollen and Stigma
Quantity of Pollen produced at split off point (66,000 × 65/100)
Quantity of Stigma produced at split off point (66,000 × 35/100)
Statement showing apportionment of joint costs:
Sales [42,900 × 90] and [23,100 × 300]
Less: Selling expenses
Net realizable value
75,000 kg
66,000 kg
65:35
42,900 kg
23,100 kg
Pollen
Stigma
Rupees in ‘000
3,861
6,930
(135)
(306)
3,726
6,624 = 10,350
(3,726/10,350)x9000 (6,624/10,350)x9,000
Allocation of joint costs
3,240
5,760
(b) Advise to CL whether it should produce Seeds or sell Pollen without further processing:
Computation of output of Seeds:
Transfer of Pollen to dept. B for further processing
Input of material Y in dept. B
Total material in dept. B
Yield (96% of input material) [54,900 × 96%]
Statement showing profit earned from Seeds:
Sales [52,704 × 125]
Less: Expenses
Joint costs
Cost incurred in dept. B
Selling expenses
Profit from Seeds
42,900 kg
12,000 kg
54,900 kg
52,704 kg
Rs. in ‘000
6,588
(W-1)
(3,240)
(1,254)
(180)
1,914
If Pollen is sold without further processing, then the profitability would be as under:
Rs 000
Sales (42,900 x 90)
3,861
Less Expenses
Joint costs – Allocated as above
(3,240)
Selling expenses
(135)
Profit from Pollen
486
Page 17 of 24
NOTE: if Pollen would be sold then no cost will be incurred in department B (as it would not be
required).
Advise: The Company’s profit has increased by Rs. 1,428,000 (i.e. Rs. 1,914,000 – Rs. 486,000) on further
processing of Pollen into Seeds. Therefore, it is advisable to CL to further process Pollen into Seeds.
W-1: Cost incurred in Department B
Dept. B
Rupees in 000
300
540
234
180
1,254
Material Y [12,000 × Rs. 25]
Labor [3,600 × Rs. 150]
Variable overheads [3,600 × Rs. 65]
Fixed overheads [3,600 × Rs. 50]
Total cost
A.6
a) Allocation on the basis of sale value at split-off point
Product A
Product B
Units produced
12,000
16,000
Sale price/unit
1,200
1,400
Total Sale value
14,400,000
22,400,000
Cost after split off point
(1,900,000)
(3,116,262)
(Given)
(W-1)
Sale value at split off point
12,500,000
19,283,000
(hypothetical market value)
Allocation of Joint cost:
A 12,500,000/61,480,000 x 21,400,000 = 4,351,008
B 19,283,000 / 61,480,000 x 21,400,000 = 6,712,040
C 29,696,262 / 61,480,000 x 21,400,000 = 10,336,695
Workings
W-1 Total Further processing cost of Product B and C
a) Packing material cost
Product B
Units
16,000
Packing material/unit
4 sq feet
Total packing material
64,000
in sq feet
Cost of packing material
2,560,000
(sq feet x 40)
b)
Operating cost = 1,860,000
Product C
20,000
1,850
37,000,000
(7,303,738)
(W-1)
29,696,262
Total
61,480,000
Product C
20,000
7.5 sq feet
150,000
Total
214,000
6,000,000
8,560,000
(480,000+720,000+660,000)
Product B share = 64,000/214,000 x 1,860,000 = 556,262
Product C share = 150,000/214,000 x 1,860,000 = 1,303,738
Total Further Processing Cost:
B = 2,560,000 + 556,262 = 3,116,262
C = 6,000,000 + 1,303,738 = 7,303,738
Page 18 of 24
And HE(ALLAH) is with you wherever you are. [57:4]
b) Revenue that will be obtained at split-off point = 16,000 x 1,200 = 19,200,000
Revenue that will be obtained if joint product is processed further
=16,000 x 1,400 = 22,400,000
Less: Incremental cost of further processing
= 2,560,000
(16,000 x 160)
= 19,840,000
Decision:
Company should sell the product B after packing because it result into greater profit.
Note: Packing machine operating expenses are fixed and are not directly attributable to product B only;
therefore ignored while working. They still have to be incurred for processing product C.
A.7 a)
Output of Orange
Quantity of Mango at split off point (198,000÷55 x40)
Kg
198,000
144,000
Quantity of good output of Mango (144,000 x 88%)
Quantity of good output of Leaf (14,400 x 10%)
126,720
14,400
Loss in Department 1 (198,000÷55 x 5)
18,000
Total units started (144,000 + 198,000 + 18,000)
Units
360,000
Rs.
11,520,000
Cost of Raw material in Department 1 (360,000 x 32)
Costs of labour and overheads in Department 1
(1,060,000 + 795,000)
1,855,000
Total Department 1 cost
13,375,000
Department 3 costs
Conv. Cost in Department 3 (880,000 + 660,000)
Less Sales of Leaf (14,400 x 12)
1,540,000
(172,800)
Net Department 3 cost
1,367,200
Market Value
Orange
Mango
Quantity
198,000
126,720
Hypothetical market value at split off point
Selling
price
Orange
8,910,000
Mango
Department 1 costs allocated
8,110,080
Further processing
Costs
(1,260,000)
(720 + 540)
(1,367,200)
Rate
45
64
8,910,000
8,110,080
7,650,000
6,742,880
14,392,880
Page 19 of 24
Orange
7,108,984
(7,650,000/14,392,880 x 13,375,000)
Mango
Product
Revenue
Orange
8,910,000
Mango
8,110,080
Total Profit for the month of January
6,226,016
Apportioned costs Further processing costs
(7,108,984)
(1,260,000)
(6,226,016)
(1,367,200)
Profit
541,016
476,864
1,017,880
b)
Income statement for the month of January:
Orange
Mango
8,469,000
7,758,080
(198,000-9,800)×45
(126,720-5,500)×64
Sales
Cost
Opening Stock
Cost
of
manufactured
goods
Closing Stock (W 1)
Gross profit
W-1
Total
16,227,080
-8,368,984
-7,633,216
16,002,200
(7,108,984+1,260,000)
(414,222)
(7,954,762)
514,238
(6,266,016+1,367,200)
(331,303)
(7,301,913)
456,167
(745,525)
(15,256,675)
970,405
Closing Stock:
Orange = 8,363,984 ÷ 198,000 × 9,800 = 414,222
Mango = 7,633,216 ÷ 126,720 × 5,500 = 331,303
Page 20 of 24
Do your best and Allah will do the rest.
Extra practice questions
Question No. 1
Oceanic Chemicals manufactures two joint products Sigma and Beta in a single process at its production
department. Incidental to the production of these products, it produces a by product known as ZEE.
Sigma and ZEE are sold upon completion of processing in production department whereas Beta goes to
refining department where it is converted into Theta.
Joint costs are allocated to Sigma and Beta on the basis of their net realizable values. Proceeds from
sale of by product are treated as reduction in joint costs. In both the departments, losses upto 5% of the
input are considered as a normal loss.
Actual data for the month of June 2015:
Department
Production
Cost
Refining
------ Rs. In ‘000’------
Material input at Rs. 50 per liter
3,000
-
Direct labour at Rs. 100 per hour
2,500
350
Production overheads
1,850
890
Output
---------- Liters -----------
Sigma
34,800
-
Beta
16,055
-
5,845
-
-
15,200
ZEE (by product)
Theta
Sigma, Theta and by product ZEE were sold at Rs. 300, Rs. 500 and Rs. 40 per liter respectively. There
was no work in process at the beginning and the end of the month.
Required:
Compute the cost per liter of Sigma and Theta, for the month of June 2015.
Question No. 2
ABC Ltd. Produces two joint products, COCO and SODA. A further product CRUST, is also made as a by
product of one of the processes for making SODA. Each product is sold in bottles of one litre capacity.
It is now December 2002. You are a cost accountant for ABC Ltd. You have been instructed to allocate
the company’s joint costs for the year October 2001 to September 2002 between COCO and SODA, but
not to the by-product CRUST.
During the year, 2 million litres of a raw material, Neckter, costing Rs. 3 million were processed in
Department Alpha with no wastage. The processing costs were Rs. 1.675 million.
50% of the output of Department Alpha was unfinished COCO, for which there was no external market. It
was transferred to Department Beta where it was further processed at an additional cost of Rs. 8.1
million. Normal wastage by evaporation was 16% of the input of unfinished COCO. The remaining good
output of finished COCO was sold for Rs. 10 per litre in the outside market.
The other 50% of the output from the joint process in department Alpha was in the form of processed
Neckter. It was all transferred to Department Gamma, as there was no outside market for processed
Neckter. In Department Gamma it was further processed, with no wastage, at cost of Rs. 30.9 million.
72% of the output of Department Gamma was in the form of unfinished SODA, for which there was no
external market. It was transferred to Department Delta, were it was subjected to a finishing process at a
further cost of Rs. 719,000. Normal spoilage of 16.67% of the input to the finishing process was
observed. The spoiled material was disposed off without charge, as effluent. The remaining finished
SODA was sold in the outside market for Rs. 60 per litre.
Page 21 of 24
The remaining 28% of the output of Department Gamma was in the form of finished CRUST, the by
product. It was sold in outside market for Rs. 8 per litre, but due to its dangerous nature, special delivery
costs of Rs. 70,000 were incurred in respect of it.
Required:
(a)
To allocate the appropriate joint costs between COCO and SODA on the basis of relative sales
value at split off point.
(b)
To prepare a statement showing profit or loss attributed to each of the products and the total profit
or loss for the year on basis of the information above and allocating joint costs as in (a) above.
Answer No. 1
Oceanic Chemicals
Product wise cost of Sigma and Theta
Sigma
Theta
------ Rs. In ‘000’-----Joint cost of Production (W-2)
4,395.23
Cost of refining (W-2)
2,679.24
1,236.00
4,395.23
3,915.24
No. of units produced (litres)
34,800
15,200
Cost per litre
126.30
257.58
Workings:
(W-1)
Theta 15,200 kgs
Sigma 34,800 kgs
N. Loss 803 kgs
Beta 16,055 kgs
R
Zee 5,845 kgs
P
Input
N. Loss 3,000kgs(10%of Input)
(16,055 × 5%)
Ab..Loss 52 kgs
Ab.. Loss 300 kgs (balance)
60,000 Kgs
Joint
Production
(3,000,000
/ 50) Cost:
Further Processing Costs:
= [3,000 + 2,500 + 1,850 – (5,845 × 40)] = 7,116,200
[350 + 890] = 1,240
Treatment of by-product is similar to treatment of
normal loss.
Cost of Ab. Loss: 


 × 300
 34,800 + 16,055 + 300 
Cost of abnormal loss: 
= 41,733
7,116,200

1,240 
 × 52 = 4,228
 15,200 + 52 


1,240
 15,200
 15,200 + 52

Cost of Theta: 
=1,235,772
Net Cost of Direct products to be allocated to Sigma and Beta: 7,116,200 – 41,733 = 7,074,470
Page 22 of 24
My Allah has always been kind to me. [Quran 19:49]
(W-2)
Allocation of Joint Cost:
Units
Sale price/litre
Rs. ‘000’
Rs. ‘000’
Rs. 000
Sale price
Further processing
NRV
Sigma
34,800
300
10,440
--
10,440
Beta
15,200
500
7,600
1,236*
6,364
16,804
 350,000 + 890,000 
* 
 × 15,200 = 1,235,772
15,200 + 52


Allocation of Joint Cost:
Rs.000
Sigma
(10,440/16,804) × 7,074,470
=
4,395.23
Beta
(6,364/16,804) × 7,074,470
=
2,679.24
7,074.47
Answer:
(i)
Joint Cost Allocation:
Total Joint Cost:
Rs. ‘000’
Raw Material =
3,000
Processing Cost =
1,675
4,675
Allocation: (W-1)
COCO
=
300/6,851 × 4,675
=
205
SODA
=
6,551/6,851 × 4,675
=
4,470
4,675
Workings:
(W-1) Sale Value at Split off Point:
Qty
S.P/Unit
Ultimate MV
Further
Processing Cost
COCO
840
10
8,400
8,100
SODA
600
60
36,000
29,449
(28,730 + 719)
S.P at Split off
300
6,551
6,851
Page 23 of 24
(ii)
Income Statement
Sales
Rs. ‘000’
Rs. ‘000’
Rs. ‘000’
COCO
SODA
Total
8,400
36,000
44,400
--
--
--
205
4,470
4,675
Cost of sale:
Opening Stock
Cost of goods Manufactured:
Joint Cost
In Beta
8,100
8,100
In Gamma
28,730
28,730
719
719
8,305
33,919
42,224
(--)
(--)
(--)
(8,305)
(33,919)
(42,224)
95
2,081
2,176
In Delta
Closing Stock
Gross Profit
Diagram: (Rs. In ‘000’) (IT IS TO BE CORRECTED)
Rs. 8,100
COCO
2,000,000 Alpha
RM =
3,000
Conv. = 1,675
[840,000]
Beta
COCO (84%)
N. Loss (16%)
[1,000,000]
Processed Nectar
[1,000,000]
Rs. 719
[160,000]
[720,000]
Gamma
Rs. 30,900
Delta
600,000 (83.33%)
N. Loss (16.67%)
[120,000]
SODA (28%)
(72%)
Crust
280,000
[280,000]× 8 = 2,240 – 70 = 2,170
2,170
Page 24 of 24
186 ‫جب کوئی دعا مانگنے واال مجھ سے دعا مانگتا ہے تو میں اس کی دعا قبول کرتا ہوں ۔ ( سورہ االبقرہ آیت‬
Process Costing
In this topic will be learn to prepare a work in process account.
Discussion of factory ledgers
Normal loss:
Loss which is uncontrollable in production process considering the nature of the product and production
process /environment. Cost is not allocated to normal loss. If it has some recovery value then it is
deducted from production cost (as a recovery against cost of production).
Abnormal Loss:
Loss which is controllable, but has not been controlled. This is that loss which is over and above the
expected loss (Normal loss). Cost is allocated to abnormal loss just like other units and recognized as an
expense in income statement (after deducting recovery value if any).
Abnormal gain:
Reduction in the units of normal loss. Units of abnormal gain are measured like other units.
Scenario No.1
Normal loss has no recovery value.
Particulars
Input Units
Units
1,000
1,000
Process A/C
Rs.
Particulars
100,000
Output
Normal loss (10% of
input)
Units
900
100
Rs.
100,000
-
100,000
1,000
100,000
Process A/C
Rs.
Particulars
100,000
Output
Normal loss(10% of
input)
Units
900
100 (×5)
Rs.
99,500
500
100,000
1,000
100,000
Units
9800
100 (×5)
Rs.
98,495
500
100
1,005
10,000
100,000
100,000÷900 = 111.111/unit
Scenario No.2
Normal loss has some recovery value
Particulars
Input Units
Units
1,000
1,000
(100,000 – 500)÷900 = 110.56/unit
Scenario No.3
Normal loss has a recovery value and abnormal loss.
Process A/C
Particulars
Units
Rs.
Particulars
Input Units
10,000
100,000
Output
Normal loss (1% of
input)
Abnormal loss (bal.)
10,000
100,000
[(100,000 – 500) ÷ (9800+100)] = 10.05/unit
9,800 × 10.05
= 98,495
100 × 10.05
= 1,005
Page 1 of 39
Scenario No.4
Abnormal gain.
Particulars
Input Units
Units
1,000
Abnormal gain (bal)
20
Process A/C
Rs.
Particulars
100,000
Output
Normal loss (10 % of
input)
2,215
1,020
102,215
Units
920
100 (×5)
Rs.
101,715
500
1,020
102,215
[(100,000 – 500) ÷ (920-20)]
= 110.56/unit
110.56× 920
= 101,715
110.56× 20
= 2,215
Input of 920 units, 20 units are not expected to be produced (means produced extra). This gain is to be
recognized in income statement.
Q.1
Castrol is an industrial lubricant which is formed by subjecting crude chemicals to two successive
processes. The output of process-1 is transferred to process-2 where other chemicals are added. The
process-1 and 2 were as follows;
Process-1
Material
3,000 lbs @0.25/lb
Labor
Rs.120
Process plant time
12 hours @ 20/hour
Process-2
Material
2,000 lbs @0.4/lb
Labor
Rs.84
Process plant time
20 hours @ 13.5/hour
Other production overheads for the period amounted to Rs.357 and is to be allocated to the processes
on the basis of labor cost. The normal output of processs-1 is 80% of input and of process-2 is 90% of
input. Wastage from process-1 is sold for Rs.0.2/lb and that from process-2 for Rs.0.3/lb.
The output from processes were as follows;
Process-1
2,300 lbs
Process-2
4,000 lbs
There is no stock of work in process at either the beginning or the end of the period and assume that all
available waste had been sold at prices indicated above.
Required:
You are required to show that how the above data would be recorded in a system of cost accounts by
preparing Process Account No. 1 & 2, Normal loss account and Abnormal gain/loss account.
Cost Accounting Procedures for factory overhead
The quantity and cost of materials and labour used on a given order can generally be measured in a straight
forward and reasonably exact manner. The cost element, factory overhead, presents a more detailed
problem.
If a company contracts to make 50 units, the material cost and labour cost can be taken from material
requisitions and labour time sheets. But how much depreciation of factory building and other factory assets,
how much power, light, insurance, repairs, security guard salary, plant manager salary etc were necessary
to produce 50 units of this contract. An extra difficulty is that some of these expenses remain fixed
regardless of units produced, while some overheads like lubricating oil, power vary with the quantity of
goods manufactured. How, then is it possible to charge a finished job (means a completed contract) at the
time of completion with reasonable share of factory overhead when actual amount of these expenses is
often not known until the end of accounting period.
Page 2 of 39
ALLAH knows what is best for us and when it is best for us to have it.
Estimated factory overhead
Factory overhead are entered on the job order cost sheets on the basis of a predetermined factory overhead
rate based on an appropriate base like direct labour hours, direct labour cost, machine hours etc. The
procedure is as follows:
Suppose accountant determines a relationship between two factors such as direct labour hours and factory
overhead and uses this relationship as the means of charging factory overhead to jobs. For example,
company’s direct labour hours for the month were estimated to be 7,000 hours and factory overhead were
estimated to 15,400 / month. These estimates lead to the assumption that for each hour of direct labour
there is Rs. 2.2 (15,400/7,000 hours) of factory overhead. The job order cost sheet for any job done during
the period would disclose the factory overheads applicable to the job (direct labour hours worked on the
job multiplied by the factory overhead rate) (e.g. 1,000 hrs × 2.2) = 2,200.
The cost accounting entry of applied factory overheads is:
WIP
A /c
2,200
F OH A /c
2,200
The actual amounts of factory overheads are recorded during the period by using the following entry, e.g:
F OH A /c
Cash / payable
xx
xx
At the end of the period, the difference if any in the factory overheads account is adjusted as over / under
applied overheads either as an adjustment in cost of sales or in gross profit. (Preferably in cost of sales)
Q.2 A chemical is manufactured by passing through two processes X and Y using two types of direct
material, A and B. In process Y, a by-product is also produced which is then transferred to process Z
where it is completed. For the first week of a month, the actual data has been as follows:
Process
X
Y
Z
Output of main product
(kgs)
9,400
8,000
Output of byproduct
(kgs)
1,400
1,250
Direct material - A (9,500 units)
(Rs.)
123,500
Direct material - B added in process (kgs)
500
300
20
Direct material - B added in process (Rs.)
19,500
48,100
1,651
Direct wages
(Rs.)
15,000
10,000
500
Scrap value
(Rs. per unit)
5
10
6
Normal loss of units in process
(%)
4
5
5
The factory overheads are budgeted @ 240% of direct wages. Actual factory overheads for the week
amounted to Rs. 65,000. Estimated sales value of the by-product at the time of transfer to process Z was
Rs. 22 per unit.
Required:
Prepare the following:
a) Process accounts for X, Y and Z.
b) Normal loss, abnormal loss and abnormal gain accounts.
c) Factory overhead account.
Note: if nothing is mentioned then % of loss is on the basis of input.
Page 3 of 39
I.
II.
III.
IV.
Q. 3 Star Chemicals Limited uses three processes to manufacture a product “ST”. After the third process
the product is transferred to finished goods warehouse.
The following data for the month of January 2007 is available:
PROCESS
I
II
III
----------Rs. in thousands------Raw material – A
1,500
Other direct materials
2,500
3,200
4,000
Direct wages
5,000
6,000
8,000
Direct expenses
1,600
1,885
2,020
Following additional information is also available:
Production overheads are absorbed @ 80% of direct wages;
20,000 units of raw material ‘A’ having a cost of Rs. 1,500,000 were initially put in process-I.
In each process, an amount of Rs. 500,000 has been wrongly classified as direct wages, instead of
indirect wages.
The actual output obtained during the month was as under:
Process I
18,500 units
Process II
16,000 units
Process III
16,000 units
Normal loss in each process is 10%, 10% and 5% respectively. Scrap value per unit is Rs. 100 for processI, Rs. 200 for process-II and Rs. 300 for process-III.
(vi) There was no stock at the start or at the end of any process.
Required:
Prepare the following in the books of Star Chemicals Limited:
(a) Ledger account for each process;
(b) Normal loss and abnormal gain/ (loss) account.
7.1 QB
Work in process
In three hours, 6 questions have been 50% completed, so 6 x 50% = 3 questions are completed.
In three hours out of 6, 3 questions are 100 % completed, 1 is 60% completed,1 not started and 1 is 50%
completed.
So,
3+0.6+0+0.5 = 4.1 question completed
Sometimes all units started in a process during an accounting period are not fully completed in that
accounting period. For example, let’s assume during the year ended 30-06-2010:
Input
1,000 units
Output
800 units
Closing work in process (40% completed) 200 units
Cost incurred during the period
100,000
On how many units the work has been done. Definitely 1,000 units, but all units are not converted into
finished goods. In these circumstances to allocate the cost, equivalent production units are calculated.
Equivalent Production Units:
It means the number of units that would have been completed had the resources been directed towards
the completion of units of each period e.g:
800 =fully completed units
80 = (200×40%)
880
These 200 units are equal to 80 completed units; so on 200 units cost of 80 completed units should be
allocated.
Per unit cost = (100,000 ÷ 880) = 113.63/unit
Therefore cost is allocated as follows:
Cost of output = 800 × 113.63
= Rs.90,909
WIP
= 200 × 40% × 113.63 = Rs.9,090
Page 4 of 39
‫ بے شک یہ قیامت کے دن اپنے پڑھنے والے کی سفارش کرے گا۔‬،‫قرآن پاک کی تالوت کیا کرو‬
Scenario 2:
Process A/C (Incomplete)
Particulars
Units
Rs.
Particulars
Units
Rs.
Input
4,000
16,000
Output
2,750
?
Direct Labor
8,125
Normal loss (10% of
400
700
input)
FOH
3,498
Abnormal Loss
150
?
c/d
700
?
4,000
27,623
4,000
?
Closing WIP is completed as follows:
Material= 100%
Labor= 50%
FOH = 40%
If nothing is mentioned then assume that abnormal loss units are identified at the end of the process.
Equivalent Units:
Material
Labor
FOH
Output
2,750
2,750
2,750
Abnormal Loss
150
150
150
Closing WIP
700
350
280
3,600
3,250
3,180
Cost per unit:
Material
= (16,000 – 700)
=15,300 ÷ 3,600
=4.25
Labor
=8,125 ÷ 3,250
=2.50
FOH
= 3,498 ÷ 3,180
=1.10
7.85
Cost of output = 2,750 × 7.85
= Rs.21,587
Abnormal loss =150 × 7.85
= Rs.1,178
WIP:
- Material
= 700 × 100% × 4.25
= 2,975
- Labor
= 700 × 50% × 2.50
= 875
- FOH
= 700 × 40% × 1.1
= 308 = Rs.4,158 .
Total
Rs.26,923
Opening work in process: if there is opening work in process, then the total equivalent units are
calculated either by using FIFO or weighted average.
Basic discussion:
Units
Opening Stock
Add: Purchases
Less: Closing stock
Cost of sales
-10,000
(500)
9,500
Amount
-500,000
(25,000)
475,000
‘or’ 9,500 × 50
If there is no opening stock, there is no need of FIFO or weighted average (in any case answer will be
same)
Opening stock (FIFO)
Opening Stock
Add: Purchases
Less: Closing stock
Units
10,000
70,000
(8,000)
72,000
Amount
1,000,000
8,400,000
(960,000)*
8,440,000**
Page 5 of 39
*8,400,000 / 70,000 x 8,000 = 960,000
**or 10,000
= 1,000,000
+ 8,400,000 / 70,000
x 62,000
= 7,440,000
8,440,000
Opening stock (Weighted Average)
Opening Stock
Add: Purchases
Less: Closing stock
Units
10,000
70,000
(8,000)
72,000
Amount
1,000,000
8,400,000
(940,000)*
8,460,000**
*[1,000,000 + 8,400,000 / 10,000 + 70,000] x 8,000 = 940,000
** or[1,000,000 + 8,400,000 / 10,000 + 70,000] x 72,000 = 8,460,000
Q. 4 Production data of ABC Corporation for May 2019 is given below:
Started in May
50,000
Completed in May
46,000
Ending work-in-process
12,000
Beginning work-in-process
8,000
The beginning work-in-process was 90% complete regarding direct materials and 40% complete
regarding conversion costs. The ending work-in-process inventory was 60% complete regarding direct
material & 30% complete regarding conversion costs.
Costs incurred during the period are as follows:
Material
500,000
Conversion
200,000
Cost of opening work in process is 80,000 comprising of 70,000 material and 10,000 conversion.
Required:
Prepare schedule of equivalent units for:
• Work done during May only (means FIFO method)
• The work done to date ( means weighted average method)
If there is opening work in process then Process Account can be prepared by using either:
FIFO
[for the period only]
Weighted. Average
[work done to date]
Q. 5 On 1st September, 1908 Company’s opening inventory was 400 units, complete as to material and
50% as to conversion. The material cost of opening stock was 12,000 and the conversion cost was 4,000.
During September, 1,100 units were started and 1,300 were completed. The closing stock was complete
as to materials and ¾ complete as to conversion. Raw material purchases during September were
20,000. Manufacturing cost of September comprise of:
▪
Raw material consumed of 22,550
▪
Conversion cost is 15,750
Required:
Prepare a process account for the period of September by using.
(i)
FIFO ; and
(ii)
Weighted Average
Page 6 of 39
AND that is He (ALLAH) Who enriches and suffices. [53:48]
Q. 6 Yahya Limited produces a single product that passes through three departments, A, B and C.
The company uses FIFO method for process costing. A review of department A’s cost records for the
month of January 2008 shows the following details:
Units Material Rs.
Labor Rs.
` Work in process inventory as at January 1, 2008
16,000
64,000
28,000
(75% complete as to conversion costs)
Additional units started in January 2008
110,000
Material costs incurred
430,500
Labor costs incurred
230,000
Work in process inventory as at January 31, 2008
18,000
(50% complete as to conversion costs)
Units completed and transferred in January 2008
100,000
Overheads are applied at the rate of 120% of direct labor. Normal spoilage is 5% of output.
The spoiled units are sold in the market at Rs. 6 per unit.
Required:
Compute the following for the month of January:
a) Equivalent production units.
b) Costs per unit for material, labor and factory overhead.
c) Cost of abnormal loss (or gain), closing work in process and the units transferred to the next
process.
Note: if nothing is mentioned then assume that units are 100 % complete with respect to material.
Important Points:
Whether we should use FIFO or Weighted Average: (In case of a silent question)
➢
Use of FIFO is only possible where completion stage in terms of % of each cost component (means
Material / Labour / Overhead) of opening WIP is available.
➢
Average method can only be applied in a situation where analysis in terms of amount of opening
WIP is available (means breakup of amount of opening WIP into of Material, Labour and Overhead
amounts are available).
➢
If both are available then make an assumption and then use FIFO because it is a better approach.
Second or Subsequent Department or Processes
Example:
Department – I
Blending Department
Opening WIP
Units started during the period
Cost incurred during the period in the department:
Material
Labor
Factory overheads
Rs.
-50,000
24,500
29,140
28,200
Units transferred to next department = 45,000 units
Closing work in process = 4,000 units (all material, ½ conversion)
Normal loss = 1,000 units
Department – II
Testing Department
Opening WIP
Units received from Department – I
Cost incurred during the period in the department:
Labor
Factory overheads
Rs.
-45,000
37,310
32,800
Page 7 of 39
Units transferred to next department = 40,000
Closing work in process = 3,000 units ( 1/3 conversion)
Normal loss = 2,000 units.
Solution:
(a)
Process Account
Blending Department (Department – I)
Units
b/d WIP
Input
Material
Labor
F-OH
-50,000
Amount
-24,500
29,140
28,200
81,880
50,000
Units
Amount
Transferred to P II
Normal loss
45,000
1,000
77,400
c/d WIP
4,000
50,000
4,440
81,880
WORKINGS:
Equivalent Units:
Material
45,000
4,000 (100%)
49,000
Transferred out
Closing WIP
Per Unit Cost:
Material
=
Labour
=
OH
=
24,500
29,140
28,200
÷
÷
÷
49,000
47,000
47,000
=
=
=
Conversion
45,000
2,000 (50%)
47,000
0.5/unit
0.62/unit
0.6/unit
1.72/unit
Cost Accounted For:
Transferred out
= 45,000 × 1.72
Closing WIP
= (4,000 × 0.5 + 4,000 × 50% × 0.62 + 4,000 × 50% × 0.6) =
(b)
= 77,400
4,440
Process Account
Testing Department (Department – II)
Units
b/d
Process I
Labor
F-OH
-45,000
45,000
Amount
-77,400
37,310
32,800
147,510
Output
Normal loss
Closing WIP
Units
40,000
2,000
Amount
140,400
--
3,000
45,000
7,110
147,510
WORKINGS:
Equivalent Units:
Transferred out
Closing WIP
40,000
3,000
Previous
Deptt.
40,000
3,000 (100%)
43,000
Labour
FOH
40,000
1,000 (1/3)
41,000
40,000
1,000 (1/3)
41,000
Per Unit Cost:
Previous department
=
77,400
43,000
=
1.8/unit
Labour
=
37,310
41,000
=
0.91/unit
OH
=
32,800
41,000
=
0.80/unit
Total
3.51/unit
Page 8 of 39
The bigger the desire for a sin, the bigger will be your Iman if you leave it.
Cost Accounted For:
Transferred out
= (40,000 × 3.51)
140,400
Closing WIP
= (3,000 × 1.8 + 1,000 × 0.91 + 1,000 × 0.8) =
7,110
7.2 Hornbill QB
Hornbill solution:
Process Account – Department B
Units
b/d
Previous department
Direct labour
F-OH
-55,000
55,000
Amount
-99,000
27,520
15,480
142,000
Transferred out
N. Loss (balance)
c/d WIP
Units
39,500
5,000
Amount
117,710
--
10,500
55,000
24,290
142,000
WORKINGS:
Equivalent Units:
Previous
Department
39,500
10,500
50,000
Transferred out
Closing WIP
(should be
department)
complete
with
respect
*Units in Process (for labour & F-OH)
10,500 × 50% × 40%
=
10,500 × 20% × 30%
=
10,500 × 30% × 24.5%
=
Cost/Unit:
Previous Department
Labour
F-OH
=
=
=
to
Direct
Labour
39,500
3,500*
43,000
F-OH
39,500
3,500*
43,000
previous
2,100
630
770
3,500
99,000 ÷ 50,000
27,520 ÷ 43,000
15,480 ÷ 43,000
=
=
=
Cost Accounted For:
39,500 × 2.98
c/d work in process = (10,500 × 1.98 + 3,500 × 0.64 + 3,500 × 0.36)
1.98
0.64
0.36
2.98
=
=
117,710
24,290
142,000
Q. 7 The M S C manufactures a single product on a continuous plan in three departments. On November
1, the work in process inventory in Department 2 was:
Cost in preceding department
Rs.13,130
Materials — Department 2
None
Labor — Department 2
Rs.500
Factory overhead — Department 2
Rs.50
Units in process
5,000
Costs in Department 2 during November were:
Labor
Rs.14,200
Factory overhead
Rs.3,450
During November, 70,000 units were received from Department 1 at a unit cost of Rs.2.641; 68,000
units were completed in Department 2, of which 60,000 were transferred to Department 3, and 8,000
were on hand in Department 2 at the end of the month. Four thousand units were still in process,
estimated to be one-half complete as to labor and factory overhead. The balance was lost within the
Page 9 of 39
department; its cost is to be absorbed by all the finished and unfinished production of the department
(means a normal loss). [if in question, nature of loss is not available then assume it is a normal loss]
Required:
A November process account for Department 2, using the average costing method for beginning work in
process inventories.
Note: breakup of cost of opening work in process is given which is required in weighted average
method.
Q.8 F C C Inc. operates three producing departments—Molding, Painting, and Finishing. During August,
the Painting Department transferred 12,400 units to the Finishing Department, lost 500 units, and had
800 units in process at the end of August. There were 2,400 units in process on August 1 in the Painting
Department. The remaining units started in the Painting Department during August were received from
the Molding Department. The costs incurred in the Painting Department during August were: materials,
Rs.5,886; labor, Rs.7,830; and factory overhead, Rs.1,134. The work in process inventory on August 1
was Rs.6,656. The costs transferred to the Painting Department from the Molding Department
amounted to Rs.23,797.80. The Painting Department work in process inventory was three-fourths
complete on August 1 and one-fourth complete on August 31.
Required:
The August process account for the painting department using the FIFO method of accounting for
beginning inventories.(Carry unit cost computation to four decimal places)
Note: no need of breakup of amount of opening work in process if FIFO is to be used. Only stage of
completion in terms of % of opening work in process is required.
Question Fowl Limited from question bank 7.3
A
Fowl Limited
Process Account
b/d
Units
15,000
Input (balance)
82,500
Amount
115,000
(90,000+25,000)
Material
547,125
228,875
Conversion
Units
Transferred
X
Y
Abnormal loss
Normal loss
c/d WIP
97,500
891,000
Amount
50,000
25,000
750,000
4,250
8,250(×1.5)
36,125
12,375
10,000
97,500
92,500
891,000
Calculation of Input Units:
Units produced – X
–Y
Wastage (given)
Closing WIP
Opening WIP
50,000
25,000
75,000
12,500
10,000
(15,000)
82,500
Normal loss is 10% of tested units. No normal loss from opening WIP in current period because opening
WIP is 75% complete (and would have been tested last period). However closing WIP would have been
tested during the period as it is also 75% complete. It means all input during the period would have been
tested therefore 10% of input is normal loss i.e 82,,500 × 10% = 8,250.
Abnormal loss = Total Loss – Normal Loss
= 12,500 – 8,250
= 4,250
Page 10 of 39
‫اپنے ماں باپ کو اف تک بھی نا کہو اور ان کے لئے دعا کرتے رہا کرو ۔‬
Equivalent Production Units:
Output
Abnormal loss
Closing WIP
(material at beginning)
75,000
4,250
10,000
Material
75,000
4,250
10,000
Conversion
75,000
2,125 (50%)
7,500 (75%)
89,250
84,625
Per Unit Rate:
Material
=
90,000 + 547,125 − 12,375
89,250
= 7/unit
Conversion
=
25,000 + 228,875
84,625
= 3/unit
Total
= 10/unit
Calculation of Cost:
Units completed
(75,000 × 10)
750,000
Abnormal loss
Closing WIP
(4,250 × 7) + (2,125 × 3)
(10,000 × 7) + (7,500 × 3)
36,125
92,500
878,625
If it would have been required
X=
750,000
× 50,000
75,000
Y=
750,000
× 25,000
75,000
Q.9 KS Limited operates two production departments A and B to produce a product XP-29. Following
information pertains to Department A for the month of December 2014.
Litres
Rs. in ’000
Opening work in process (Material 100%, conversion 80%)
15,000
■ Material
5,000
■ Direct labour and overheads
2,125
Actual cost for the month:
■ Material
120,000
36,240
■ Direct labour
14,224
■ Overheads
11,500
Expected losses
5%
Closing work in process (Material 100%, conversion 80%)
17,000
Units transferred to Department B
110,000
KS uses FIFO method for inventory valuation. Direct materials are added at the beginning of the process.
Expected losses are identified at the time of inspection which takes place at the end of the process.
Overheads are applied at the rate of 80% of direct labour cost.
Required:
• Equivalent production units
• Cost of goods transferred to Department B
• Accounting entries in the cost accounting system.
Page 11 of 39
Note: if nothing is mentioned then % of loss should be on the basis of inspected units (if inspection stage
is available)
Q.11 K International manufactures a single product. The product is processed in three different
departments. The company uses first-in-first-out method for process costing.
During November 2015, the costs incurred and units processed in department 2 were as follows:
Opening work in process
Units received from department 1
Cost added by department 2
Materials
Direct labor
Production overheads
Units transferred to department 3
Closing work in process
Defective units
Units
2,000
53,000
Rs.
128,750
2,057,500
988,000
488,000
244,000
48,000
5,000
2,000
The normal loss is 5% of the units produced (including defective units) and is identified at the start of the
process. The defective units are sold at Rs. 15 per unit. Details of percentage of completion of opening and
closing work in process are as follows:
Materials
Labour and production overheads
Work in Process
Opening
Closing
80%
70%
60%
50%
Required:
Prepare process account of department 2 for the month of November 2015.
Note: Question cannot be solved by using weighted Average because breakup of the cost components of
opening WIP is not available.
Q.12 K International manufactures a single product. The product is processed in three different
departments. The company uses first-in-first-out method for process costing.
During November 2015, the costs incurred and units processed in department 2 were as follows:
Opening work in process
Units received from department 1
Cost added by department 2
Materials
Direct labor
Production overheads
Units transferred to department 3
Closing work in process
Defective units (normal loss)
Units
2,000
53,000
Rs.
128,750
2,057,500
988,000
488,000
244,000
48,000
5,000
2,000
The defective units are sold at Rs. 15 per unit. Details of percentage of completion of opening and closing
work in process are as follows:
Materials
Labour and production overheads
Work in Process
Opening
Closing
80%
70%
60%
50%
Required:
Prepare process account of department 2 for the month of November 2015.
Page 12 of 39
Worldly life is very short, so turn to ALLAH before you return to ALLAH.
Question of reverse working:
Q.13 K International manufactures a single product. The product is processed in three different
departments. The company uses first-in-first-out method for process costing.
During November 2015, the costs incurred and units processed in department 2 were as follows:
Units
2,000
53,000
Opening work in process
Units received from department 1
Cost added by department 2:
Materials
Direct labor
Production overheads
Units transferred to department 3
Closing work in process
Defective units (normal loss)
Rs.
128,750
?
?
488,000
244,000
48,000
5,000
2,000
The defective units are sold at Rs. 15 per unit. Details of percentage of completion of opening and closing
work in process are as follows:
Work in Process
Opening
Closing
80%
70%
60%
50%
Materials
Labour and production overheads
Following are per unit costs in department II:
Department I
39.75/unit
Material
19.8/unit
Required:
Prepare process account of department 2 for the month of November 2015.
Page 13 of 39
SOLUTIONS
A.1
Process - I
Qty.
3,000
Material
Labor
Plant time (12×20)
Overheads
(120/204)×357
Value
750
120
240
210
3,000
=
Process-II (Given )
Normal loss (20% of 3,000)
Abnormal loss
1,320
Qty.
2,300 [0.5]
600 [0.2]
100 [0.5]
Value
1,150
120
50
3,000
1,320
Qty.
4,000 [0.6]
430 [0.3]
Value
2,400
129
1,320 − 120
= 0.5 / unit.
2,300 + 100
Process - II
Process I
Material
Labor
Plant time (20×135)
Overheads (84/204×357)
Abnormal Gain
Qty.
2,300
2,000
130 [0.6]
Value
1,150
800
84
270
147
78
4,430
2,529
(1,150 + 800 + 84 + 270 + 147)
Finished Goods (Given)
Normal loss
4,300 x 1%
4,430
2,529
Units
600
300
Amount
120
90
2,451 − 129
= 0.6 / unit
4,000 − 130
Normal Loss A/C
Units
600
430
Process - I
Process - II
Amount
120
129
Cash (Process – I)
Cash (Process – II)
(Actual loss)
Abnormal Gain A/c
(Opportunity cost of not
producing normal loss)
130
39
Abnormal Loss A/C
Units
100
Process - I
Amount
50
Cash (Process – I)
P/L
Units
100
Amount
20
30
Units
130
Amount
78
Units
9,400
400 (×5)
Amount
188,000
2,000
200
4,000
10,000
194,000
Abnormal Gain
Units
130
Normal loss
P/L
Amount
39
39
Process – II
Net 9 gain in P/L
A.2
Process Account X
Direct Material A
Direct Material B
Direct wages
F-O.H (240% of D.L)
[15,000 × 240%]
Units
9,500
500
10,000
Per Unit Cost =
Amount
123,500
19,500
15,000
36,000
194,000
Output (transferred to Y)
Normal loss
(9,500 + 500)×4%
Abnormal loss (Bal.)
194,000 − 2,000
= 20 / unit
9,400 + 200
Page 14 of 39
What if worldly life is not perfect? It is not Jannah. Worldy life is a test.
Output = 9,400 × 20 = 188,000
Abnormal loss = 200 × 20 = 4,000
Process Account Y
Units
9,400
300
Received from X
Direct Material-B
Direct Wages
F-O.H (240%)
Abnormal Gain (balance)
Per Unit
Amount
188,000
48,100
10,000
24,000
185
9,885
Output (To F.G)
Normal loss
(9,400 + 300) × 5%
By Product Z
(1,400 × 22)
Units
8,000
485 (×10)
Amount
240,000
4,850
1,400
30,800
9,885
275,650
5,550
275,650
= 188,000 + 48,100 + 10,000 + 24,000 – 4,850 – 30,800 / 8,000 - 185
= 30 / Unit

8,000 × 30 = 240,000

185 × 30 = 5,550
Process Account Z
Units
1,400
20
Received Y
Material-B
Wages
F-O.H (240%)
1,420
Per Unit =
Amount
30,800
1,651
500
1,200
34,151
Units
Output (To F.G)
Normal loss
(1,400 + 20) × 5%
Abnormal loss (balance)
71 [×6]
Amount
31,250
426
99 [×0.5]
1,420
2,475
34,151
1,250 [×25]
34,577
30,800 + 1,651 + 500 + 1,200 − 426
=
= 25 / unit
1,250 + 99
1,349

1,250 × 25 = 31,250

99 × 25 = 2,475
Normal Loss Account
Units Amount
Abnormal Loss Account
Units
Amount
Units Amount
Units
Amount
P-X
400
2,000 Cash-X
400 (×5)
2,000 P-X
200
4,000 Cash-X
200(×5)
100
P-Y
485
4,850 Cash-Y
300(×10)
(485 –185)
3,000 P-Z
99
2,475 Cash-Z
99(×6)
594
P-Z
71
--
4,801
299
6,475
426 Cash-Y
71(×6)
Abnormal
Gain A/c
(Bal.)
956
7,276
426
1,850 (Opp. of not
producing
normal loss)
956
7,276
F-O.H Account
Actual
Amount
Applied
P/L
185
299
6,475
Abnormal Gain Account
Amount
Units
65,000 X
36,000
Normal loss A/c
Y
24,000
Z
1,200
P/L Gain
CGS
3,800
(under applied)
Amount
185
1,850 P-Y
Units
185
Amounts
5,550
---
3,700
Page 15 of 39
A.3
Process Account I
Material
Other Direct Material.
Direct Expenses
Direct Wages (5M – 0.5M)
F-OH (4,500,000×80%)
Abnormal gain (balance)
Per Unit =
Units
20,000
---
Amount
1,500,000
2,500,000
1,600,000
--500
20,500
4,500,000
3,600,000
375,000
14,075,000
Output (P II)
Normal
(20,000×10%)
loss
Units
18,500
Amount
13,875,000
2,000
200,000
20,500
14,075,000
1,500,000 + 2,500,000 + 1,600,000 + 4,500,000 + 3,600,000 − 200,000
18,500 − 500
Per Unit = 750
= 18,500 × 750 = 13,875,000
500 × 750 = 375,000
Process Account II
Units
18,500
---
From Process – I
Other Direct Material
Direct Wages
FOH (5,500×80%)
D. Wages (6M – 0.5M)
18,500
Per Unit =
Amount
13,875,000
3,200,000
1,885,000
4,400,000
5,500,000
28,860,000
Units
Output (P III)
Normal loss
Abnormal loss (bal.)
1,850
650
Amount
27,377,778
370,000
1,112,222
18,500
28,860,000
16,000
13,875,000 + 3,200,000 + 5,500,000 + 1,885,000 + 4,400,000 − 370,000
16,000 + 650
= 1,711.11
16,000 × 1711.11
= 27,377,778
650 × 1711.11
= 1,112,222
Process Account III
From Process - II
Other Direct Material
Direct Wages
(8,000,000 – 500,000
Direct Expenses
F-OH (7.5×80%)
Abnormal Gain (balance)
Per Unit =
Per Unit
Units
16,000
--
Amount
27,377,778
4,000,000
---800
16,800
7,500,000
2,020,000
6,000,000
2,455,662
49,353,440
Output
Normal loss (5% 16,000)
Units
16,000
800
[×300]
Amount
49,113,440
240,000
18,500
49,353,440
27,377,778 + 4,000,000 + 7,500,000 + 2,020,000 + 6,000,000 − 240,000
16,000 − 800
= 3,069.59
= 16,000 × 3,069.59 = 49,113,440
= 800 × 3,069.59
= 2,455,672
Page 16 of 39
‫جو شخص سیدھی راہ پر چلے گا اسے نا دنیا میں کوئی ڈر ہے اور نا آخرت میں کوئی غم۔‬
Normal Loss Account
Process - I
Process - II
Process - III
Units
2,000
1,850
800
Amount
200,000
370,000
240,000
4,650
810,000
P – I Cash (2,000–500)
P – II Cash
P – III Cash (800 –
500)
Abnormal gain (bal.)
Units
1,500
1,850
--
Amount
150,000
370,000
--
1,300
4,650
290,000
810,000
Units
500
800
Amount
375,000
2,455,662
1,300
2,830,662
Units
650
Amount
130,000
-650
982,223
1,112,223
Abnormal Gain Account
Normal Loss Account
Units
1,300
Amount
290,000
1,300
2,540,662
2,830,662
P/L Gain (Balance)
P-I
P-III
Abnormal Loss Account
Process – II
Units
650
Amount
1,112,223
650
1,112,223
Cash (×200)
P/L (Loss)
Net Gain = 1,558,439 (2,540,662 – 9822,223)
A.4
(a) ABC Corporation
Work in Process A/c – FIFO
Units
8,000
50,000
b/d WIP
Input
Material
Conversion cost
58,000
Amount
80,000
500,000
200,000
780,000
Output
c/d WIP
Units
46,000
Amount
686,224
12,000
58,000
93,780
780,000
FIFO for the period only
WORKINGS:
Material
=
500,000
= 10.87 per unit
* 800 + 38,000 + * * 7,200
*8,000 x 10%; **12,000 x 60%
Conversion cost =
200,000
= 4.31 per unit
* 4,800 + 38,000 + * * 3,600
*8,000 x 40%; **12,000 x 30%
OR
Equivalent Units:
8,000
Material
800
(10%)
Conversion
4,800
(60%)
Output 46,000
c/d WIP
38,000
12,000
38,000
7,200
46,000
(60%)
38,000
3,600
46,400
(30%)
Per Unit:
Material
500,000
=
46,000
10.87/unit
Page 17 of 39
200,000
=
46,400
Conversion cost
4.31/unit
15.18/unit
Calculation of Cost:
Cost of output of 46,000 units:
Cost of 8,000 units b/d:
+ 800 × 10.87 =
+ 4,800 × 4.31 =
80,000
8,696
20,688
109,384
+ 38,000 × 15.18
Total Cost of Output
576,840
686,224
Cost of Closing WIP:
[7,200 × 10.87] + [3,600 × 4.31]
=
93,780
(b) Process account (Weighted average)
Units
8,000
50,000
b/d WIP
Input
Material
Conversion cost
58,000
Amount
80,000
500,000
200,000
780,000
Output
c/d
=
70,000 + 500,000
= 10.71 per unit
7,200 + 800 + 38,000 + 7,200
Conversion cost =
10,000 + 200,000
= 4.23 per unit
3,200 + 4,800 + 38,000 + 3,600
Material
Units
46,000
Amount
687,240
12,000
58,000
92,340
780,000
OR
Equivalent Units:
Output
c/d WIP
Material
46,000
7,200 (60%)
53,200
46,000
12,000
Conversion
46,000
3,600 (40%)
49,600
Per Unit:
Material
70,000 + 500,000
= 10.71/unit
53,200
=
10,000 + 200,000
= 4.23/unit
49,600
14.94/unit
Conversion cost =
Cost Calculation:
Output = 46,000 × 14.94 = 687,240
c/d WIP = (7,200 × 10.71) + (3,600 × 4.23) =
92,340
A.5
(i) FIFO
b/d
Input material
Conversion cost
Process account
Units
400
1,100
1,500
Amount
16,000
22,550
15,750
54,300
Output
c/d
Units
1,300
200
Amount
48,310
5,990
1,500
54,300
Page 18 of 39
Equivalent Units:
Completed
1,300
Closing WIP
Total during the period
Cost for the period
Per unit
There is no might nor power except in ALLAH.
Material
--
400 →
900 →
200
Conversion
200
900
200
1,100
22,550
20.5
900
150
1,250
15,750
12.6
(400 × 50%)
(200 × 75%)
Cost of Units Completed:
Cost of opening units b/d
Cost during the period (200 × 12.6)
16,000
2,520
18,520
Started & Completed in the period
900 × (20.5 + 12.6)
29,790
48,310
Total
Closing WIP
[200 x 20.5 + 150 x 12.6]
5,990
(ii) Weighted average:
b/d
Input material
Conversion cost
Process account
Units
400
1,100
1,500
Amount
16,000
22,550
15,750
54,300
Output
c/d
Units
1,300
200
Amount
47,650
6,650
1,500
54,300
Equivalent Units:
Completed
Closing WIP
Total units
Total Cost
Material
1,300
200
1,500
34,500
Per unit
(22,550+12,000)
23.03
(15,750
4,000)
+
36.65
Cost of Units Completed:
1,300 × 36.65
W-2
(200 × 75%)
13.62
Total cost per unit
W-1
Conversion
1300
150
1,450
19,750
47,650
Closing WIP:
Material
= 200 × 23.03 =
Conversion = 150 × 13.62 =
4,606
2,043
6,650
Page 19 of 39
A.6
Yahya Limited
Process Account
Units
16,000
110,000
b/d
Input
Material
Labour
FOH (230,000×1.2)
Amount
125,600
-430,500
230,000
276,000
126,000
Units Completed
Abnormal loss (bal)
Normal loss (5 %)
c/d
1,062,070
Units
100,000
Amount
891,256
3,000
5,000
18,000
126,000
26,622
30,000
114,192
1,062,070
Equivalent Units (FIFO):
Material
Conversion Cost
-84,000
3,000
18,000
105,000
4,000
84,000
3,000
9,000
100,000
Completed
16,000
84,000
100,000
Abnormal loss
Closing WIP
Material
Labour
FOH
=
=
=
(430,500 – 30,000)
230,000
276,000
÷
÷
÷
(10%)
105,000
100,000
100,000
=
=
=
(25%)
(50%)
3.814
2.3
2.76
8.874
Cost Calculation:
Units Completed:
Opening units cost
Current Period Cost on Opening units:
Labour
(16,000 × 25% × 2.3)
Overheads
(16,000 × 25% × 2.76)
Cost of 84,000 units
(84,000 × 8.874)
Rs.
125,600
Closing WIP:
Material =
Labour =
Overhead =
Rs.
68,652
20,700
24,840
114,192
9,200
11,040
745,416
891,256
(18,000 × 3.814)
(9,000 × 2.3)
(9,000 × 2.76)
Abnormal Loss: (3,000 × 8.874) = 26,622
If Weighted Average:
YAHYA LIMITED
Process Account
b/d
Input units
Material
Units
16,000
110,000
Labor
F-OH (230,000 × 1.2)
Amount
125,600
Units completed
430,500
Normal
output)
230,000
276,000
Abnormal loss (bal.)
c/d
126,000
1,062,100
loss
(5%
of
Units
100,000
Amount
890,000
5,000
30,000
3,000
26,700
18,000
126,000
114,660
1,062,100
Page 20 of 39
Say O! Muhammad (SAW)] sufficient for me is ALLAH [9:129]
Equivalent Units: (Weighted Average)
Completed
Abnormal loss
c/d WIP
Cost/Unit:
Material
Labour
FOH
Material
100,000
3,000
18,000
121,000
100,000
3,000
18,000
Conversion
100,000
3,000
9,000
112,000
(64,000 + 430,500 – 30,000) = 464,500
(28,000 + 230,000) = 258,000
(33,600 + 276,000) = 309,600
=
=
=
÷
÷
÷
121,000
112,000
112,000
=
=
=
3.84/unit
2.30/unit
2.76/unit
8.9/unit
Cost Accounted For:
Units completed = 100,000 × 8.9
= 890,000
Abnormal loss
= 3,000 × 8.9
= 26,700
Closing WIP
= (18,000 × 3.84) + (9,000 × 2.3) + (9,000 × 2.76) =
114,660
Process Account – Department 2
A.7
Units
5,000
70,000
b/d
Department – 1
Labor
F-OH
75,000
Amount
13,680*
184,870
14,200
3,450
216,200
Units
60,000
8,000
3,000
4,000
75,000
Department – 3
Completed in hand
Normal loss (bal)
c/d WIP
Amount
180,600
24,080
-11,520
216,200
*[13,130 + 500 + 50]
WORKINGS:
Equivalent Units:
Transferred out
Completed
Closing WIP
Proceeding Department
60,000
8,000
4,000
72,000
60,000
8,000
4,000
Labor
60,000
8,000
2,000
70,000
F-OH
60,000
8,000
2,000
70,000
Per Unit Cost:
Proceeding department
=
13,130 + 184,870
72,000
=
2.75/unit
Labor
=
500 + 14,200
70,000
=
0.21/unit
F-OH
=
50 + 3,450
70,000
=
0.05/unit
Total
3.01/unit
Calculation of Cost:
Transferred units
Completed in hand
Closing WIP
= 60,000 × 3.01
= 8,000 × 3.01
= (4,000 × 2.75) + (2,000 × 0.21) + (20,000 × 0.05)
=
=
=
180,600
24,080
11,520
Page 21 of 39
A.8
Process Account – Painting Department
Units
2,400
11,300
b/d
From Moulding Dep. (bal.)
Material
Labor
F-OH
13,700
Amount
6,650
23,797
5,886
7,830
1,134
45,303
Transferred to Firing
Normal loss
Units
12,400
500
Amount
43,266
--
800
2,038
13,700
45,303
c/d WIP
WORKINGS:
Equivalent Units:
Transferred
2,400
12,400
10,000
c/d WIP
800
Proceeding
Department
--
Material
Labor
F-OH
600
600
600
10,000
800
10,800
10,000
200
10,800
10,000
200
10,800
10,000
200
10,800
Per Unit Calculation:
Proceeding department
=
Material
Labor
F-OH
Total
=
=
=
23,797 / 10,800
5,886
7,830
1,134
÷
÷
÷
10,800
10,800
10,800
=
2.2034
=
=
=
0.545
0.725
0.105
3.5784
Calculation of Cost:
Finished goods
From Opening Units = 6,656 + 600 × 0.545 + 600 × 0.725 + 600 × 0.105
For the Period
= 10,000 × 3.5784
= 7,481
= 35,784
= 43,266
= (800 × 2.2035) + (200 × 0.545) + (200 × 0.725) + (200 × 0.105) = 2,038
Closing WIP
A.9
KS Limited
Calculation of normal loss:
15,000 x 5%
= 750
(120,000 - 17,000) x 5% = 5,150
Total normal loss
(a)
= 5,900
Equivalent Production Units (FIFO)
Output
15,000
95,000
110,000
Abnormal loss (At end)
c/d WIP
2,100
17,000
Material
-95,000
2,100
17,000
114,100
Conversion
3,000
95,000
2,100
13,600
113,700
(20%)
(80%)
Cost / Unit:
Material
=
36,240,000
114,100
=
317.62
Page 22 of 39
(b)
Conversion
=
Total Cost /unit
=
14,224 + 11,379
113,700
=
225.18
=
542.80
Cost of Output
15,000 units – opening cost
+ 3,000 × 225.18 – cost during the period
+ 95,000 × 542.8
Total Cost
=
=
=
=
=
7,125
676
7,801
51,566
59,367
Cost of Abnormal Loss: 2,100 × 542.8
=
1,140
Cost of Closing Stock: (17,000 × 317.62) + (13,600 × 225.18)
(c)
8,462
Accounting Entries:
Date
31-122014
Rs. ‘000’
36,240
Particular
WIP – A
Rs. ‘000’
Material Account
36,240
WIP – A
14,224
Payroll Account
14,224
WIP – A
11,379
F-OH Account (14,224 x 80%)
31-122014
31-122014
F-OH Account
11,379
11,500
Cash/Payables
COS (W - 1 )
11,500
121
F-OH Account
121
W–I
F-OH
Cash
Date
31-122014
31-122014
11,500
WIP
COS (bal)
11,379
121
Rs. ‘000’
59,367
Particular
WIP Account – B
WIP Account - A
P/L (Abnormal loss)
Rs. ‘000’
59,367
1,140
WIP Account – A
1,140
Process Account (not required for additional information)
b/d
Material (Input)
Payroll
F-OH (80%)
Units
15,000
120,000
135,000
•
Amount
7,125*
36,240
14,224
11,379
68,968
WIP – B
Normal loss
Abnormal loss
c/d
Units
110,000
5,900
2,100
17,000
135,000
Amount
59,367
1,140
8,462
68,968
*5,000 + 2,125 = 7,125
Page 23 of 39
Same question if weighted Average Method:
KS Limited
Process Account
Units
15,000
120,000
b/d
Input units
Material
Labor
OH (80%)
Amount
7,125
36,240
14,224
11,379
68,968
135,000
Output
Normal loss
Abnormal loss
c/d
Units
110,000
5,900
2,100
Amount
59,403
-1,134
17,000
135,000
8,431
68,968
WORKINGS:
Equivalent Units (Weighted Average)
Output
Abnormal loss (end)
c/d WIP
Material
110,000
2,100
17,000
129,100
110,000
21,000
17,000
Conversion
110,000
2,100
13,600
125,700
(80%)
Cost / Litre:
Material
Conversion
=
=
[5,000 + 36,240)
[2,125 + 14,224
+ 11,379)
÷
÷
129,100
125,700
=
=
Rs.
319.44
220.59
540.03
Cost Accounted For:
Output
Abnormal loss
c/d WIP
=
=
=
110,000 × 540.03
2,100 × 540.03
(17,000 × 319.44) + (13,600 × 220.59)
=
=
=
Rs. ’000’
59,403
1,134
8,431
68,968
A.11
Process Account – Department 2
Units
2,000
53,000
b/d
Received from dep. 1
Direct Material
Direct Wages
Production OHs
Abnormal Gain (bal)
500
55,500
Amount
128,750
2,057,500
988,000
488,000
244,000
37,500
3,943,750
Units
Amount
Transferred
N. loss (48,000+2,000)5%
(2,500 x 15)
48,000
2,500
3,598,750
37,000
c/d
5,000
55,500
307,500
3,943,750
Equivalent Production Units: (FIFO)
Transferred
48,000
Closing WIP
Abnormal Gain
2,000
46,000
5,000
Previous
-46,000
5,000
(500)
50,500
Material
400 (20%)
46,000
3,500 (70%)
(500)
49,400
Conversion
800 (40%)
46,000
2,500 (50%)
(500)
48,400
Cost/ Unit:
Rs.
Transferred
=
2,057,500 − 37,500
50,500
Material
=
988,000
49,400
=
40
=
20
Page 24 of 39
We should be Proud to be Muslim. ALHAMDULLILAH!
Wages
=
488,000
48,800
=
10
OH
=
244,000
48,800
=
5
75
Cost to be accounted for:
Output:
Opening cost of 2,000 units
+
400 × 20 + 800 × 10 + 800 × 5
+
46,000 × 75
c/d WIP
Abnormal Gain
=
=
=
(5,000 × 40 + 3,500 × 20 + 2,500 × 10 + 2,500 × 5)
500 × 75
128,750
20,000
3,450,000
3,598,750
=
=
307,500
37,500
A.12
Process Account – Department 2
Units
Amount
2,000
128,750 Normal loss (2,000 x 15)
53,000 2,057,500 Transferred to Dep. III
988,000
488,000
244,000 c/d WIP
55,000 3,906,250
b/d WIP
Received from dep. I
Material
Wages
F-OH
Units
2,000
48,000
Amount
30,000
3,570,950
5,000
55,000
305,175
3,906,250
Equivalent Units: (FIFO)
Transferred
2,000
46,000
5,000
Closing WIP
Department - I
-46,000
5,000
51,000
Material
400
46,000
3,500
49,900
Labor
800
46,000
2,500
49,300
F-OH
800
46,000
2,500
49,300
Cost/ Unit:
Rs.
Department – I
=
2,057,500 − 30,000
51,000
=
39.75
Material
=
988,000
49,900
=
19.8
Labor
=
488,000
49,300
=
9.9
F-OH
=
244,000
49,300
=
4.95
Total
74.4
Cost Calculations:
Transferred Units =
48,000
2,000
46,000
c/d WIP
=
128,750 + 400 × 19.8 + 800 × 9.9 + 800 ×
4.95
46,000 × 74.4
5,000 × 39.75 + 3,500 × 19.8 + 2,500 × 9.9 + 2,500 × 4.95
=
148,550
=
=
3,422,400
3,570,950
=
305,175
Page 25 of 39
A.13
Process Account – Department 2
Units
2,000
53,000
b/d WIP
Received from dep. I (W)
Material (W)
Wages
F-OH
55,000
Amount
128,750
2,057,500
988,000
488,000
244,000
3,906,250
Normal loss
Transferred to Dep. III
c/d WIP
Units
2,000
48,000
Amount
30,000
3,570,950
5,000
55,000
305,175
3,906,250
Equivalent Units: (FIFO)
Transferred
2,000
46,000
5,000
Closing WIP
Department – I
-46,000
5,000
51,000
Material
400 (20%)
46,000
3,500 (70%)
49,900
Labor
800 (40%)
46,000
2,500 (50%)
49,300
F-OH
800 (40%)
46,000
2,500 (50%)
49,300
Cost/ Unit:
Rs.
Department – I
=
2,057,500 − 30,000
51,000
=
39.75
Material
=
988,000
49,900
=
19.8
Labor
=
488,000
49,300
=
9.9
F-OH
=
244,000
49,300
=
4.95
Total
74.4
Cost Calculations:
Transferred Units =
48,000
2,000
46,000
c/d WIP
=
128,750 + 400 × 19.8 + 800 × 9.9 + 800 ×
4.95
46,000 × 74.4
5,000 × 39.75 + 3,500 × 19.8 + 2,500 × 9.9 + 2,500 × 4.95
=
148,550
=
=
3,422,400
3,570,950
=
305,175
Page 26 of 39
Extra practice questions
‫تہجد کا وقت روٹھے رب کو منانے کا وقت ہے ۔‬
Process Costing Test:
Question 1
Quality Chemicals (QC) produces one of its products through two processes A and B. Following information
has been extracted from the records of process A for the month of January 2016.
Quantity
Units
Opening work in process
Material
Conversion
------ Rs. In ‘000’ ------
5,000
2,713
1,499
Input during the month
20,000
10,000
5,760
Transferred to process B
18,000
-
-
Closing work in process
6,000
-
-
Additional information:
(i)
Materials are introduced at the beginning of the process. In respect of conversion, opening and
closing work in process inventories were 40% and 60% complete, respectively.
(ii)
Inspection is performed when the units are 50% complete. Expected rejection is estimated at 5% of
the inspected units. The rejected units are not processed further and sold at Rs. 100 per unit.
(iii)
QC uses ‘weighted average method’ for inventory valuation.
Required:
(a)
Compute equivalent production units and cost per unit.
(05)
(b)
Prepare journal entries to record the above transactions.
(06)
Question 2
Ravi Limited (RL) is engaged in production of industrial goods. It receives orders from steel manufactures
and follows job order costing. The following information pertains to an order received on 1 December 2016
for 6,000 units of a product:
(i)
Production details for the month of December 2016:
Units
(ii)
Produced and transferred to finished goods
3,200
Delivered to the buyer from the finished goods
3,000
Units rejected during inspection
120
Closing work in process (100% material and 80% conversion)
680
Actual expenses for the month of December 2016:
Rupees
Direct material
1,140,000
Direct labour (6,320 hours)
948,000
Factory overheads
800,000
Additional information:
•
Factory overheads are applied at Rs. 120 per hour. Under/over applied factory overheads are
charged to profit and loss account.
•
Units completed are inspected and transferred to finished goods. Normal rejection is estimated at
10% of the units transferred to finished goods. The rejected units are sold as scrap at Rs. 150 per
unit.
•
RL uses weighted average method for inventory valuation.
Required:
(a)
(b)
Prepare work in process account for the month of December 2016.
Prepare accounting entries to record:
•
Over/under applied overheads
•
Production losses and gains
(08)
(05)
Page 27 of 39
Question 2A
Beta Enterprises (BE) produces a chemical that requires two separate processes for its completion.
Following information pertains to process II for the month of August 2016:
Rs. In ‘000’
Kg
Opening work in process (85% to conversion)
5,000
2,000
Received from process I
30,000
18,000
Material added in process II
15,000
10,000
-
11,000
Costs for the month:
Conversion cost incurred in process II
Finished goods transferred to warehouse
40,000
Closing work in process (60% to conversion)
4,000
In process II, material is added at start of the process and conversion costs are incurred evenly throughout
the process. Process losses are determined on inspection which is carried out on 80% completion of the
process. Process loss is estimated at 10% of the inspected quantity and is sold for Rs. 100 per kg.
BE uses FIFO method for inventory valuation.
Required:
(a)
Prepare a statement of equivalent production units.
(b)
Compute cost of:
(c)
(04)
(i) finished goods (ii) closing WIP (iii) abnormal loss/gain
(09)
Prepare accounting entries to record production gain/loss for the month.
(03)
Q.3 A company manufactures various lines of bicycles. The company uses a process cost system using
the weighted average method to determine unit cost. Bicycle parts are manufactured in the Molding
Department; the parts are consolidated into a single bicycle unit in the Molding Department and transferred
to the Assembly Department, where they are assembled. After assembly, the bicycles are sent to the
Packing Department.
Cost per unit data for the standard model has been completed through the Molding Department. Annual
cost and production figures for the Assembly department are given below:
•
Defective bicycles are identified at an inspection point when the assembly labour process is 70%
complete; all assembly materials have been added prior to this point of the process. The normal
rejection % for defective bicycle is 5% of the bicycles reaching the inspection point. Any defective
bicycles above the normal rejection are considered as abnormal spoilage. All defective bicycles are
removed from the production process and disposed off with zero disposal value.
•
Assembly Department Cost Data
T. in from
Molding
Prior Period Costs
Current Period Costs
Total Costs
•
Rs.
82,200
1,237,800
1,320,000
Assembly
Materials
Rs.
6,660
96,840
103,500
Assembly
Conversion
Cost
Rs.
11,930
236,590
248,520
Total Cost
Rs.
100,790
1,571,230
1,672,020
Assembly Department Production Data
Bicycles
Beginning Inventory
T. in from molding dep. During the year
T. out to packing dep. during the year
Ending Inventory
3,000
45,000
40,000
4,000
T. in Cost
%
100
100
100
100
Assembly
Materials %
100%
100%
50%
Assembly
Conversion
Costs %
80%
100%
20%
Required:
Process Account showing necessary computation, relating to assembly department.
Page 28 of 39
‫یا ہللا اپنے سوا کسی کا محتاج نا کرنا ۔‬
Q.4 The following information is obtained in respect of process II for the month of July.
Opening WIP
Stage of Completion of opening WIP:
Material
70%
Labor
60%
Overheads
60%
Transfer from process – I
Transfer to process – III
During the period, following amounts were uncured:
Direct Material
Direct Labor
Production Overheads
Closing WIP
Stage of Completion of closing WIP:
Material
60%
Labor
40%
Overheads
40%
Units
1,600
Rs.
276,000
10,200
9,200
510,000
224,000
657,000
876,000
1,800
Normal loss is 1,000 units. Units lost realized Rs. 50/unit.
Required:
(i)
Process Account II (Using FIFO)
(ii)
Abnormal Gain Account
(iii)
Normal Loss Account
Page 29 of 39
Answer 1
Process Account
Rs. ‘000’
Units
b/d
Amount
5,000
Input
Units
4,212
(2,713+1,499)
20,000
Material
Output
Amount
18,000
15,660
N.Loss (5,000+20,000) ×
5%
1,250
125
(1,250 x
100)
c/d
6,000
4,404
25,250
20,189
10,000
Conversion
5,760
Ab. Gain (balance)
250
217
25,250
20,189
Equivalent Units:
Material
Conversion
Output
18,000
18,000
18,000
c/d WIP
6,000
6,.000
3,600 (60%)
250
(250)
(250)
23,750
21,350
Ab. Gain
Per Unit:
Material
=
2,713 + 10,000 − 125
23,750
=
530
Conversion
=
1,499 + 5,760
21,350
=
340
870
Cost Allocation:
Output
=
18,000 × 870
=
15,660,000
c/d WIP
=
6,000 × 530 + 3,600 × 340
=
4,404,000
Ab. Gain
=
250 × 870
=
217,500
Answer 2
Ravi Limited
Work in process for the month of December, 2016
Rs. ‘000’
Units
b/d
Direct material (bal.)
Amount
--
--
4,000
1,140,000
Direct labour
948,000
F-OH (6,320 × 120)
758,400
Ab. Gain
200
155,646
4,200
3,002,046
Units
Finished goods
Amount
3,200
2,490,336
N. Loss (3,200 × 10%)
320
48,000
(320x150)
c/d WIP
680
463,714
4,200
3,002,050
Page 30 of 39
Faith is trusting ALLAH even when you do not understand his plan.
Equivalent Units:
Material
Output
3,200
c/d WIP
Ab. Gain
Conversion
3,200
3,200
680
680
544 (80%)
(200)
(200)
(200)
3,680
3,544
Cost Per Unit:
Material
=
1,140,000 − 48,000
3,680
=
296.74
Conversion
=
948,000 + 758,400
3,544
=
481.49
Total
778.23
Cost Allocation:
Output
=
3,200 × 778.23
=
2,490,336
Closing WIP
=
680 × 296.74 + 544 × 481.49
=
463,714
Ab. Gain
=
200 × 778.23
=
155,646
Accounting Entries:
(i)
F-OH
(ii)
WIP
(iii)
PL
800,000
Cash
800,000
758,400
F-OH
(iv)
(v)
(vi)
(vii)
(viii)
758,400
41,600
F-OH
WIP Account
Ab. Gain
Normal loss
WIP Account
Cash
N. Loss
Ab. Gain
N. Loss
Ab. Gain
P/L
41,600
155,646
155,646
48,000
48,000
18,000
18,000
30,000
30,000
125,646
125,646
Workings:
F-OH Account
800,000 WIP
PL
Cash
758,400
41,600
Normal Loss
WIP
320
48,000
Cash
Ab. Gain
120
200
18,000
30,000
WIP
200
155,646
Abnormal Gain
Normal Loss
PL
200
30,000
125,646
Page 31 of 39
Answer 2A
Process Account – II
Units
b/d WIP
Amount
Units
5,000
1,000,000
Process I
30,000
18,000,000
Material
15,000
10,000,000
Conversion
Output
11,000,000
50,000
Amount
40,000
35,524,118
Normal loss (working)
4,100
410,000
Abnormal loss (Bal.)
1,900
1,703,221
c/d WIP
4,000
3,363,896
50,000
41,001,235
41,000,000
Calculation of Normal Loss:
Opening WIP
5,000
Input (30 + 15)
45,000
Closing WIP
(4,000)
Inspections stage
100% M : 60% Conversion (will be tested)
100% M ; 80% Conversion.
41,000
(a)
100% M ; 85% Conversion (Already tested)
x 10% = 4,100
Equivalent Production Units: (FIFO)
Process I
Output
40,000
Material
Conversion
5,000
--
--
750(15%)
35,000
35,000
35,000
35,000
Ab. Loss
1,900
1,900
1,900
1,520 (80%)
c/d WIP
4,000
4,000
4,000
2,400 (60%)
40,900
40,900
39,670
Per Unit:
Process – I =
Material =
10,000,000
= 244.50
40,900
Conversion =
(b)
18,000,000 − 410,000
= 430.10
40,900
11,000,000
= 277.29
39,670
Cost Allocation:
Output =
5,000 units from Opening
+ 750 × 277.29 =
+ 35,000 × 951.89 =
40,000 units
2,000,000
307,968
2,207,968
33,316,150
35,524,118
Ab. Loss:
1,900 × 430.1 + 1,900 × 244.5 + 1,520 ×
277.29
1,703,220
c/d WIP:
4,000 × 430.1 + 4,000 × 244.5 + 2,400 ×
277.29
3,419,354
Page 32 of 39
ALWAYS REMEMBER, Allah is watching us anytime, anywhere.
(c)
(i)
Abnormal loss
1,703,220
Process Account
(ii)
1,703,220
Cash/Receivable (1,900 × 100)
190,000
Abnormal loss
(iii)
190,000
Normal loss
410,000
Process Account
(iv)
410,000
Cash/receivables
410,000
Normal Loss
410,000
A.3
Process Account
b/d
From molding
Material
Conversion
Units
3,000
Amount
100,790**
45,000
1,237,800
96,840
236,590
48,000
Output
dept.)
(to
packing
*Normal loss (working)
Abnormal loss (bal.)
c/d
1,672,020
Units
40,000
Amount
1,478,800
2,050
1,950
4,000
48,000
-68,646
124,332
1,672,020
**[82,200 + 6,660 + 11,930]
*Working of Normal Loss Units:
Opening Units
=
3,000
Input Units
Less: c/d WIP
=
=
Units Inspected
× 5%
45,000
(4,000)
(should have already inspected at 70% stage in previous
period)
(should not have been yet inspected in this department
because they are at less than 70% stage)
41,000
2,050
Equivalent Units: (Weighted Average)
Output
Abnormal loss
Closing WIP
40,000
1,950
4,000
Previous
40,000
1,950
4,000
45,950
Material
40,000
1,950 (100%)
(50%)
2,000
43,950
Conversion
40,000
1,365 (70%)
800 (20%)
42,165
Cost/ Unit:
Rs.
Previous department
=
82,200 + 1,237,800
45,950
=
28.73/unit
Material
=
6,660 + 96,840
43,950
=
2.35/unit
Conversion
=
11,930 + 236,590
42,165
=
5.89/unit
36.97/unit
Calculation of Cost:
Output:
Abnormal loss:
Closing WIP:
[40,000 × 36.97]
[1,950 × 28.73 + 1,950 × 2.35 + 1,365 × 5.89]
[4,000 × 28.73 + 2,000 × 2.35 + 800 × 5.89]
=
=
=
Rs.
1,478,800
68,646
124,332
1,671,778
Page 33 of 39
If FIFO is used:
Process A/C
Amount
100,790 Packing (Output)
1,237,800
96,840 Normal Loss
236,590 Abnormal Loss
c/d
1,672,020
Units
3,000
45,000
b/d
From Molding
Material
Conversion
48,000
Units
40,000
Amount
1,478,170
2,050
1,950
4,000
48,000
68,923
124,760
1,671,,853
Equivalent Units
Previous department
3,000
Output 40,000
Abnormal Loss
37,000
1,950
c/d WIP
4,000
Per Unit:
Previous =
1,237,800
42,950
=
28.82
Material =
96,840
40,950
=
2.36
Conversion =
236,590
39,765
=
5.95
Material
Conversion
37,000
37,000
600 (20%)
37,000
1,950
1,950
1,365(70%)
4,000
42,950
2,000
40,950
800(20%)
39,765
Cost Allocation
Output =40,000 units
3,000
100,790
+600x5.95
3,570
104,360
37,000x37.13
1,373,810
1,478,170
Ab.Loss:
1,950x28.82+
1,950x2.36+
1365x5.95
68,923
c/d WIP
4,000x28.82+
2,000x2.36+
800x5.95
124,760
37.13
A.4
Process Account II
b/d
From Process I
Material
Labor
F-OH
Abnormal Gain
Units
1,600
10,200
200
12,000
Amount
276,000
510,000
224,000
657,000
876,000
50,000
2,593,000
Units
Process III
Normal loss (Given)
(1,000 x 50)
c/d
Amount
9,200
1,000
2,300,000
50,000
1,800
12,000
243,000
2,593,000
WORKINGS:
Equivalent Units: (FIFO)
Transferred
9,200
Closing WIP
Abnormal Gain
1,800
(200)
1,600
7,600
Previous
-7,600
1,800
(200)
9,200
Material
480
7,600
1,080
(200)
8,900
Labor
640
7,600
720
(200)
8,760
FOH
640
7,600
720
(200)
8,760
Page 34 of 39
‫جب دعا سے بھی بات نا بنے تو فیصلہ ہللا پر چھوڈ دو ہللا تعالی اپنے بندوں کے حق میں بہتر فیصلہ کرنے واال ہے۔‬
Cost/ Unit:
Previous department
Material
Labor
F-OH
=
=
=
=
(510,000 – 50,000) ÷ 9,200
(224,000 ÷ 8,960)
(657,000 ÷ 8,760)
(876,000 ÷ 8,760)
Rs.
50
25
75
100
250
=
=
=
=
Cost Accounted For:
Output to process II:
Opening cost on 1,600 units
+
480 × 25 + 640 × 75 + 640 × 100
+
7,600 × 250
Closing WIP
Abnormal Gain
=
=
=
1,000
400,000
1,900,000
(1,800 × 50 + 1,080 × 25 + 720 × 75 + 720 × 100)
(200 × 250)
Normal loss account
PII
276,000
124,000
50,000
Cash
800
Ab gain 200
2,300,000
=
=
243,000
50,000
Abnormal loss account
40,000
10,000
N loss
P/L(bal)
200 10,000
40,000
PII
200
50,000
Page 35 of 39
ICAP QUESTION BANK
PROCESS COSTING
7.1
PROCESS COSTING: THE BASIC RULES
The following examples take you through the basic rules for process costing.
Required
For each of the following examples, calculate:
(a)
(b)
the cost of completed output from the process, and
if there is any, the cost of any abnormal loss or the value of any abnormal gain
Example 1
1,500 litres of a liquid were input to a process at a cost of Rs.7,200. Normal loss is 20% of
the input quantity. Actual loss was equal to the normal loss.
Example 2
1,500 litres of liquid were input to a process at a cost of Rs.7,200. A normal loss of 20% of
the input is expected. The actual output for the period was only 1,100 litres.
Example 3
1,500 litres of liquid were input to a process at a cost of Rs.7,200. A normal loss of 20% of
the input is expected. Loss is sold as scrap, for a net sales price of Rs.0.40 per litre. The
actual output from the process was 1,200 litres.
Example 4
1,500 litres of liquid were input to a process at a cost of Rs.7,200. The output from the process
was 1,100 litres. Normal loss is 20% of the input quantity. Any lost units have a scrap value
of Rs.0.40 per litre.
Example 5
1,500 litres of liquid were input to a process at a cost of Rs.7,200. Normal loss is 20% of the
input quantity but the actual output for the period was 1,250 litres. Loss has no scrap value.
Example 6
1,500 litres of liquid were input to a process at a cost of Rs.7,200. The output from the process
was 1,250 units. Normal loss is 20% of the input quantity. Any lost units have a scrap value
of Rs.0.40 per litre.
7.2
HORNBILL LIMITED
Hornbill Limited (HL) produces certain chemicals for textile industry. The company has three
production departments. All materials are introduced at the beginning of the process in DepartmentA and subsequently transferred to Department-B. Any loss in Department-B is considered as a
normal loss.
The following information has been extracted from the records of HL for Department- B for the month
of August 20X3:
Opening work in process (Litres)
Closing work in process (Litres)
Units transferred from Department-A (Litres)
Units transferred to Department-C (Litres)
Labour (Rupees)
Factory overhead (Rupees)
Department B
Nil
10,500
55,000
39,500
27,520
15,480
Materials from Department-A were transferred at the cost of Rs. 1.80 per litre.
The degree of completion of work in process in terms of costs originating in Department-B was
as follows:
WIP
50% units
20% units
30% units
Completion %
40%
30%
24.5%
Page 36 of 39
Do not go near Adultery. Indeed it is ever an immorality and is evil as a way [17:32]
Required
Prepare the following for department B for the month:
a)
A statement of equivalent units.
b)
A statement showing cost per equivalent unit.
c)
A statement showing the evaluation of output.
d)
A process account.
7.3
(15)
FOWL LIMITED
Fowl Limited (FL) manufactures two joint products X and Y from a single production process.
Raw material Benz is added at the beginning of the process. Inspection is performed when the
units are 50% complete. Expected loss from rejection is estimated at 10% of the tested units.
Following details are available for the month of May 20X3:
Units
Opening work in process
15,000
Material
(Rs.)
Conversion cost
(Rs.)
90,000
25,000
547,125
228,875
Transferred to finished goods:
−
Product- X
50,000
−
Product- Y
25,000
Loss due to rejection
12,500
-
-
Closing work in process
10,000
-
-
Additional information:
(i)
(ii)
(iii)
(iv)
Opening and closing work in process are 75% complete.
The normal loss is sold as scrap at the rate of Rs. 1.50 per unit.
Production costs are allocated to joint products on the basis of weight of
output.
The company uses weighted average method for inventory valuation.
Prepare the following for department for the month:
a)
b)
c)
d)
A statement of equivalent units.
A statement showing cost per equivalent unit.
A statement showing the evaluation of output.
A process account.
(15)
Page 37 of 39
Solution:
Example 1
Input
Normal loss (20%)
Expected output
litres
1,500
300
1,200
Cost per unit of expected output = Rs.7,200/1,200 litres = Rs.6 per litre. Actual
output = 1,200 litres.
Cost of actual output = 1,200 litres × Rs.6 = Rs.7,200. There
is no abnormal loss or abnormal gain.
Example 2
Input
Normal loss (20%)
Expected output
Actual output
Abnormal loss
litres
1,500
300
1,200
1,100
100
Cost per unit = same as in Example 1, Rs.6 per litre. Cost of
actual output = 1,100 litres × Rs.6 = Rs.6,600. Cost of
abnormal loss = 100 litres × Rs.6 = Rs.600.
Example 3
Input cost
Scrap value of normal loss (300 × Rs.0.40)
Net cost of the process
Rs.
7,200
120
7,080
Cost per unit of expected output = Rs.7,080/1,200 litres = Rs.5.90 per litre. Actual
output = 1,200 litres.
Cost of actual output= 1,200 litres × Rs.5.90 = Rs.7,080. There
is no abnormal loss or abnormal gain.
Example 4
Cost per unit = same as in Example 3, Rs.5.90 per litre. Cost of
actual output = 1,100 litres × Rs.5.90 = Rs.6,490. Cost of
abnormal loss = 100 litres × Rs.5.90 = Rs.590.
This cost of abnormal loss is the amount recorded in the process account.
Page 38 of 39
The net cost of abnormal loss is reduced (in the abnormal loss account) by the scrap
value of the lost units.
Cost of abnormal loss in the process account
Scrap value of abnormal loss (100 × Rs.0.40)
Net cost of abnormal loss (= expense in the income statement)
Rs.
590
(40)
550
Example 5
Input
Normal loss (20%)
Expected output
Actual output
Abnormal gain
litres
1,500
300
1,200
1,250
50
Cost per unit = same as in Example 1, Rs.6 per litre. Cost of
actual output = 1,250 litres × Rs.6 = Rs.7,500.
Value of abnormal gain = 50 litres × Rs.6 = Rs.300 (= debit entry in the process account)
Example 6
Input
Normal loss (20%)
Expected output
Actual output
Abnormal gain
litres
1,500
300
1,200
1,250
50
Cost per unit = same as in Example 3, Rs.5.90 per litre. Cost of
actual output = 1,250 litres × Rs.5.90 = Rs.7,375. Value of
abnormal gain = 50 litres × Rs.5.90 = Rs.295.
This value of abnormal gain is the amount recorded in the process account (as a debit
entry).
The value cost of abnormal gain is reduced (in the abnormal gain account) by the scrap
value of the units that have not been lost.
Value of abnormal gain in the process account
Scrap value forgone: (50 × Rs.0.40)
Net value of abnormal gain (= income in the income statement)
Rs.
295
(20)
275
Page 39 of 39
The worst of our faults is our interest in the faults of others
Variance analysis
Fixed Budget:
The original budget prepared at the beginning of the period is known as fixed budget. A fixed budget is a
budget for a specific volume of output and sales activity, and it is the “master plan” for the financial year
that the company tries to achieve.
For example: A company has budgeted to make and sell 1000 units in January.
Selling price/unit is budgeted at Rs 15.
Budget prepared for January is as follows:
Sales
(1000 x 15)
15,000
Cost of Sales
Material
(1,000 x 2kg @ 3/kg)
6,000
Labor
(1,000 x 1hr @ 2.4/hr)
2,400
Variable overheads
(1,000 x 1hr @ 0.96/hr)
960
Fixed overheads
(1,000 x 2.4/unit)
2,400
(11,760)
Gross Profit
3,240
Absorption rate = Budgeted fixed overheads = 2,400 = 2.4/unit
Budgeted units
1,000
One of the main purposes of budgeting is to control costs by comparing budgets with actual results.
Actual results: (At the end of January)
Suppose actual units produced and sold are 900.
Sales
(900 x 16)
14,400
Cost of Sales
Material
(900 x 1.8kg @ 3.5/kg)
5,670
Labor
(900 x 1.2hr @ 2/hr)
2,160
Variable overheads
(900 x 1.2hr @ 1/hr)
1,080
Fixed overheads
Actual
2,500
(11,410)
Gross Profit
2,990
Sales
= Actual quantity sold x Actual Rate
= AQS x AR
Material = Actual quantity used x Actual Rate
= AQU x AR
Labor
= Actual hour worked x Actual Rate
= AHW x AR
Variable overhead = Actual hour worked x Actual Rate
= AHW x AR
Fixed overheads = Actual
Page 1 of 78
Variances cannot be calculated by comparing actual results to the fixed budget directly because the figures
relates to different levels of activity. Therefore, a second budget is drawn up at the end of the period (for
comparison) called as flexed budget. It is a budget based on actual level of activity using budgeted
revenue/unit and Standard cost/unit. For example flexed budget at 900 units level will be as follows:
Sales
(900 x 15)
13,500
Cost of Sales
Material
(900 x 2kg @ 3/kg)
5,400
Labor
(900 x 1hr @ 2.4/hr)
2,160
Variable overheads
(900 x 1hr @ 0.96/hr)
864
Fixed overheads
(900 x 2.4)
2,160
(10,584)
Gross Profit
2,916
Sales
= Actual quantity sold x Standard Rate
= AQS x SR
Material = Standard quantity used for actual production x Standard Rate
= SQU x SR
Labor
= Standard hour worked for actual production x Standard Rate
= SHW x SR
Variable overhead = Standard hour worked for actual production x Standard Rate
= SHW x SR
Fixed overheads = Actual Production x Standard Rate
Comparison of Actual Results with Flexed Budget:
Flexed
Actual
Units Produced/sold
900
900
Sales
13,500
14,400
Cost of Sales
Material
5,400
5,670
Labor
2,160
2,160
Variable overheads
864
1,080
Fixed overheads
2,160
2,500
(10,584)
(11,410)
Gross Profit
2,916
2,990
Variance
900 F
270 A
216 A
340 A
74 F
Page 2 of 78
Every act of goodness is (considered as) SADQAH (charity) [HADITH].
Subdivision of variances:
Material
SQU for AP x SR
=900x2x3
=5,400
AQU for AP x AR
=900 x 1.8 x 3.5/kg
=5,670
AQU for AP x SR
=900x1.8x3
=4,860
Std. Cost
Total material
Variance
Total Material Variance
Actual Cost
(SQU for AP x SR)
(AQU for AP x AR)
900 x 2 x 3
5,400
900 x 1.8 x 3.5
5,670
270A
= (SQU - AQU) x SR
[(900 x 2) – (900x1.8)]x3
= 540F
Material Usage variance
(SR – AR) AQU for AP
(3 – 3.5) x (900 x 1.2)
180A
Material Price Variance
Page 3 of 78
Labor Variance
SHW for AP x SR
=900x1x2.4
=2,160
AHW for AP x AR
=900x1.2x2
=2,160
AHW for AP x SR
=900x1.2x2.4
=2,592
Std. Cost
Total Labor Variance
Actual Cost
(SHW for AP x SR)
(900 x 1 x 2.4)
-
(AHW for AP x AR)
(900 x 1.2 x2)
NIL
= (SHW - AHW) x SR
= (900x1) – (900x1.2) x2.4
=432A
Labor efficiency variance
(SR – AR) AHW for AP
= (2.4 – 2) x (900x1.2)
=432F
Labor Rate variance
Total Variable OH Variance
Std. Cost
Actual Cost
Total variable OH
Variance
(SHW for AP x SR)
-
(AHW for AP x AR)
(900 x 1 x 0.96)
= 864
-
(900 x 1.2 x1)
1080
216A
Variable OH Efficiency
variance
= (SHW - AHW) x SR
= (900 - 1080) x0.96
=172.8 A
Variable OH Expenditure/
spending variable
(SR – AR) AHW for AP
= (0.96 – 1) x (900x1.2)
=43.2 A
Page 4 of 78
‫بہت جلد قبول ہونے والی دعا یہ ہے کہ انسان کسی غیر موجود کے لیے غائبانہ دعا کرے‬
Q. 1
EPSN enterprises manufactures a food product, Details of which are as under:
Standard cost per unit
Materials 60 Kgs.
@ Rs.48 per kg
Labor 480 Hours
@ Rs.8 per hour
Actual cost for the month:
Material 5,900 Kgs.
@ Rs.50 per kg
Labor 47,500 hours
@ Rs.9 per hour
Actual production
100 units
Required:
(a)
Compute the material and labor cost variances.
(b)
Reconcile the standard and the actual cost of material and labor.
Total fixed overheads variance:
Actual/Applied
Actual overheads
Actual production
x SR
900 x 2.4 = 2,160
2,500
340A
Under absorbed is adverse variance because actual production is less or actual expense is more.
Over absorbed is favorable variance because actual production is more or actual expense is less.
For example: let assume:
= Budgeted fixed overheads / budgeted production
= 100,000 / 1,000
= 100 / unit (fixed overheads absorption rate)
(a) Suppose actual production is 900 x 100 = 90,000 (applied) and if actual expenditure is still 100,000 (equal
to budgeted) then difference is due to production.
(b) Suppose actual production is 1,000 (equal to budgeted) x 100 = 100,000 (applied) and if actual
expenditure is 120,000 (not equal to budgeted) then difference is due to expenditure.
Subdivision of Total Fixed OH Variance
Actual overheads
Actual production
x SR
900 x 2.4 = 2,160
2,500
100 A
Budgeted
overheads
1,000 x
2.4
=2,400
240 A
Page 5 of 78
Fixed overheads expenditure variance
Actual overheads
Budgeted overheads
(1,000 x 2.4)
2,500
2,400
100 A
How much expense was expected and how much
is actually incurred. If actual fixed overheads are
more; then adverse otherwise favorable.
Q.2
Fixed overheads volume variance
Budgeted overheads
(1,000 x 2.4)
Actual production x SR
(900 x 2.4)
2,400
2,160
240 A
It measures the difference in actual production
and budgeted production. If actual production is
more; then favorable otherwise adverse.
M/s Gamma & Sons produces only one product by the name ‘'Gamma" and the standard' manufacturing cost
of the product is as under:
Direct material (4kg @ Rs.3 per kg)
12
Direct labor (5 hours @ Rs.4 per hour)
20
Variable Overhead
5
Fixed Overhead
15
Total standard per unit cost
52
The budgeted quantity to be produced is 10,000 units and actual production was 9,500 units. The actual
consumption and cost during the period was as under:
Rs.
Direct material cost (37,000 kg)
120,000
Direct labor (49,000 hours)
200,000
Variable Overheads
47,000
Fixed Overheads
145,000
512,000
There was no stock of work in process or finished goods at the beginning or end of the period.
Required:
You are required to calculate the relevant cost variances.
Page 6 of 78
O ALLAH I Seek refuge in from Evil diseases.
Subdivision of Fixed OH volume variance
Data from M/S Gamma & Sons
Fixed OH Volume variance
Budgeted FOH
Budgeted prod x S.R
= 10,000 x 15
= 150,000
Applied FOH
Actual prod x SR
= 9,500 x 15
= 142,500
7,500 A Because of decrease in actual units
The above variance can also be calculated in hours for more detailed analysis as follows:
Budgeted capacity
hrs x SR
= 10,000 x 5 x 3
= 150,000
Std. hrs for AP x SR
= 9,500 x 5 x 3
= 142,500
7500A
Actual Consumed
hrs for AP x SR
= 49,000 x 3
= 147,000
Fixed overheads Capacity Variance
Budgeted capacity hrs x S.R
Actual Hrs worked (Consumed) x S.R
How much capacity in terms of hours should be
used (50,000) and how much capacity has
actually been used (49,000)
If actual capacity in term of hours is utilized
more; It is favorable otherwise adverse
Fixed overheads Efficiency variance
Actual hrs worked (consumed) x S.R
Std. hrs for A.P x S.R
How much hours should be utilized for actual
production (i.e 47,500) and how much hours have
actually been consumed (i.e 49,000)
If actual consumed hrs are more than adverse;
otherwise favorable.
Page 7 of 78
Q.3
Brain Ltd produces and sells one product only, the Blob, the standard cost for one unit being as
follows:
Rs.
Direct material A (10 kilograms at Rs 20 per kg) Direct
200
material B (5 liters at Rs 6 per liter)
30
Direct wages (5 hours at Rs 6 per hour)
30
Fixed production overhead (5 hours at Rs 10 per hour)
50
Total standard cost
310
The fixed overhead included in the standard cost is based on an expected monthly output of 900 units. Fixed
production overhead is absorbed on the basis of direct labor hours.
During April, the actual results were as follows:
Production
800 units
Material A
7,800 kg used, costing Rs.159,900
Material B
4,300 liters used, costing Rs.23,650
Direct wages
4,200 hours worked for Rs.24,150
Fixed production overhead Rs.47,000
Required:
a) Calculate price and usage variances for each material.
b) Calculate labor rate and efficiency variances.
c) Calculate fixed production overhead expenditure and volume variances and then subdivide the volume
variance.
Page 8 of 78
Do not carry the anxiety for the future because it is in the hands of Allah.
IDLE TIME VARIANCE
Generally Actual Hours Worked = Actual Hours Paid but if there is idle time (time when the employees are being
paid but there is no work to do, e.g there is no light or shortage of orders for production). In such a case Actual
Hours Paid may be more than Actual Hours Worked.
Example:
Idle Time Variance:
Std Labour Cost / unit
= (4 hrs × 500/hr)
Actual production
= 1000 units
Labour hours paid for
= 4,200 hours at a cost of
= 2,000 / unit
= Rs. 2,121,000
Labour hours worked
= 4,100 hours.
Total Labour Variance = (SHW for A.P × S.R) – (AHP × A.R)
2,121,000 

= (1,000 × 4 × 500) –  4,200 

4,200 

= 2,000,000 – 2,121,000 = 121,000 A
(SR – A.R) × AHP
(SHW – AHP) × S.R
2,121,000 

 500 
 × 4,200
4,200 

(1,000 × 4 – 4,200) × 500
21,000 A
100,000 A
Idle Time variance
(AHP – AHW) × S.R
(4,200 – 4,100) × 500
50,000 A
Efficiency variance
(SHW – AHW) × S.R
(1,000 × 4 – 4,100) × 500
50,000 A
•
Idle hours are not considered while calculating variable overheads variances because it is usually
assumed that variable overheads are incurred during actual working hours and are not incurred during
idle time (e.g if machine is not running then power is not consumed. This mans if labour is paid for 820
hours but only worked for 760 hours, use actual hours worked (means without idle time) for variable
overhead variances.
•
Same rule is for fixed overhead variances.
Summary of Formulas of Labour Variances (If there is any idle time variance as well)
Total Labour Variance
(SHW for A.P – S.R) – (AHP × A.R)
Rate
(SR – A.R) × AHP
*Efficiency
(SHW – AHP) × S.R
Idle Time
(AHP – AHW) × S.R
Efficiency
(SHW – AHW) × S.R
*If there is idle time then break-up of efficiency variance is calculated.
Page 9 of 78
SALES VARIANCE [there is no concept of calculating total sales variances]
These variances are calculated on the basis of finished goods units.
Sales Volume variance / sales volume
profit variance
(Budgeted units sold – Actual Units sold) × Std.
Profit / unit
It measures the increase / decrease in
expected profit as a result of sales volume
being higher or lower than budgeted.
Sales Price Variance
[BR – AR] × Actual units sold
It measures the effect on expected profit of a
selling price different to budgeted selling price.
Example:
A Company has the following budgeted and actual figures:
Sales Units
Selling Price / Unit
Budget
600
30
Actual
620
29
Standard cost of production = 28 / unit.
Required:
Calculate sale variances.
(a)
Sales Volume Variance:
(600 – 620) × 2*
= 40 F
*(30 – 28)
(b)
Sales Price Variance:
(30 – 29) × 620
= 620 A
Page 10 of 78
O Allah, thank you for choosing me to be a Muslim.
Operating statement: it is a statement prepared for the management which compares actual costs and
revenues with the budgeted figures and shows variances. It reconciles the actual profits with the budgeted
profits.
ABC limited At the end
A.
ABC LIMITED:
Statement Reconciling Budgeted Profit with Actual Profit
Budgeted Profit (500,000 × 215*)
Sales Price Variance
Sales Profit Volume Variance
Actual Sales Minus Std. Cost of Sales
Rs.
107,500,000
7,000,000
(4,300,000)
110,200,000
Cost Variances:
Material Price Variance
Material Usage Variance
Labour Rate Variance
Labour Efficiency Variance
Variable OH Expenditure Variance
Variable OH Efficiency Variance
Fixed OH Expenditure Variance
Fixed OH Volume Variance
Actual Profit
Rs.
(7,500,000)
12,500,000
(6,000,000)
(3,000,000)
(1,250,000)
(750,000)
(100,000)
(200,000)
103,900,000
(Note)
F
A
A
F
A
A
A
A
A
A
*[600 – 125 – 200 – 50 – 10]
Note:
Sales
Less:
Direct Material
Direct Labour
Variable Ohs
Fixed Ohs
Actual Profit
(a)
Rs.
295,000,000
(55,000,000)
(105,000,000)
(26,000,000)
(5,100,000)
Rs.
191,100,000
103,900,000
Sales Price Variance
[BR – AR] × Actual Units Sold
295,000,000 

600 − 480,000  × 480,000


= 7,000,000 F
(b)
Sales Volume Variance
[Budgeted Sales – Actual Sales] × Std. Profit / Unit
[500,000 – 480,000] × 215
= 4,300,000 A
(c)
Material Price Variance
55,000,000 

[SR – AR] × AQP* 50 −
× 950,000
950,000 

= 7,500,000 A
*(here purchased and consumed is same as no opening & closing inventory)
(d)
Material Usage Variance
[SQU for Actual Production – Actual Quantity Used] × S.R
[(480,000 × 2.5) – 950,000] × 50
= 12,500,000 F
Page 11 of 78
(e)
Labour Rate Variance
[SR – AR] × AHW
105,000,000 

= 100 −
× 990,000
990,000 

= 6,000,000 A
(f)
Labour Efficiency Variance
[SHW for Actual Production – AHW] × S.R
[(480,000 × 2) – 990,000] × 100
= 3,000,000 A
(g)
variable overheads expenditure Variance
[SR – AR] × AHW
26,000,000 

= 25 −
× 990,000
990,000 

= 1,250,000 A
(h)
Variable OH Efficiency Variance
[SHW for Actual Production – AHW] × S.R
[(480,000 × 2) – 990,000] × 25
= 750,000 A
(i)
Fixed OH Expenditure Variance
Budgeted Fixed OH – Actual Fixed OH
(500,000 × 10) – 5,100,000
= 100,000 A
(j)
Fixed OH Volume Variance
[Budgeted Fixed OH – Actual Production × S.R]
(500,000 × 10) – (480,000 × 10)
= 200,000 A
Page 12 of 78
‫اے ہللا ہم سب کو جنت الفردوس میں جگہ عطا فرما‬
If break-up of (j) is to be calculated:
Fixed Volume Variance
Capacity Variance
Budgeted Capacity hrs × S.R = 500,000 × 2 × 5
Actual Consumed hrs. × S.R = 990,000 × 5
5,000,000
4,950,000
Efficiency Variance
Actual consumed hrs × S.R = 990,000 × 5
Std. hrs for Actual Production × S.R = 480,000×2×5
4,950,000
4,800,000
50,000 A
150,000 A
[not required for additional information]
If variable overheads and fixed overheads are to be calculated combined (Rs. 000)
Total Factory OH Variance (V – OH + F – OH)
Actual Factory-OH (26,000 + 5,100)
=
Applied Factory-OH(Actual Production × =
S.R )
(480,000 × 60*)
31,100
28,800
2,300
A
*(50 + 10)
Expenditure
Actual factory OHs
31,100
Less:
V-OH Efficiency
(SHW for A.P – AHW) × S.R
(480,000 × 2 - 990,000) × 25 = 750 A
Total Std. Cost of F-OH
AHW × S.R (990,000 ×
25)
Budgeted Prod. x S.R
(500,000 × 10)
Volume
Budgeted Fixed-OH (500,000 ×
10) =
Actual production x SR (480,000
x 10)
5,000
4,800
200 A
24,750
5,000
29,750
1,350 A
1,250 A
100 A
Page 13 of 78
Moongazer At the end
A.
If there is a stock of raw material and it is measured at std. cost then material price variance should be calculated
on AQP rather than AQU.
Budgeted Gross Profit = (100 – 77) × 450 = 10,350
MOON GAZER
Actual Gross Profit
Rs.
Sales
Less: Cost of Sales:
Material
Less: Closing Inventories (125 × 15*)
17,700
(1,875)
15,825
14,637
3,870
2,400
Labour
Variable OHs
Fixed OHs
Actual Gross Profit
Rs.
47,300
36,732
10,568
*(at Std. Cost as per Question)
Sales Variance
Price
(BR – AR) × AQS
Volume
(BQS – AQS) × Std profit /unit
47,300 

100 
 × 430
430 

(450 – 430) × 23
4,300 F
460 A
Material
(SR – AR) × AQP
(SQU – AQU) × S.R
17,700 

15 −
 × 1,200
1,200 

(430 × 2 – 1,075) × 15
300 F
3,225 A
Labour
14,637 

 8.5 −
 × 1,700
1,700 

(430 × 4 – 1,700) × 8.5
187 A
170 F
Variable OHs
3,870 

2 −
 × 1,700
1,700 

(430 × 3 – 1,700) × 2
470 A
40 F
Page 14 of 78
One who remembers ALLAH is never lonely.
Fixed OHs
Budgeted F-OH
Actual F-OH
2,250
2,400
150 A
Budgeted F-OH
Actual × S.R
Budgeted Gross profit
Sale Price variance
Sale volume variance
Actual Sale Less Std. cost of Sale
2,250
2,150
100 A
10,350
4,300
(460)
14,190
Cost Variances:
Price variance
Usage variance
Rate variance
Efficiency variance
V-OH – Expenditure variance
V-OH - Efficiency variance
F-OH – Expenditure variance
F-OH – Volume variance
Actual Gross Profit
F
A
300
(3,225)
(187)
170
(470)
40
(150)
(100)
10,568
F
A
A
F
A
F
A
A
Excellent Limited At the end
A.
(a)
Quantity Schedule:
Rs.
10,000
50,000
60,000
Opening WIP (100% M, 60% Conversion)
Units Started
Units completed & Transferred
Closing WIP (100% M, Conversion 50%)
Normal Loss (No storage should occur)
Abnormal loss (material 100%, Conversion 80%)
48,000
10,000
Nil
2,000
60,000
Equivalent Production Schedule (FIFO):
Material
Completed & Transferred
48,000
Closing WIP (balance)
Abnormal loss (material at beginning)
10,000
2,000
10,000
38,000
-38,000
10,000
2,000
50,000
Conversion
4,000 (40%)
38,000
5,000 (50%)
1,600 (80%)
48,600
VARIANCES:
Material Cost Variances (Material total Variances)
For actual production (SQU × S.R) 50,000 × 60 × 0.6
(AQU × A.R) 3,100,000 × 0.5
Rs.
1,800,000
1,550,000
250,000
F
Page 15 of 78
250,000 F
Price
(S.R – A.R) × AQU*
(0.6 – 0.5) × 3,100,000
Usage
(SQU – AQU) × S.R
[(50,000 × 60) – 3,100,000] × 0.6
60,000 A
= 310,000 F
*As given in question
Labour Cost Variances (Labour total Variances)
Rs.
1,215,000
1,300,000
85,000
(SHW × S.R) 48,000 × 0.5 × 50 = 24,300 × 50
(AHW × A.R) 1,300,000/52 = 25,000 × 52
U
85,000 U
Rate
(S.R – A.R) × AHW
(50 – 52) × 25,000
50,000 U
Efficiency
(SHW – AHW) × S.R
[(48,600 × 0.5) – 25,000] × 50
(24,300 – 25,000) × 50
35,000 U
Variable Overheads Total Variance
Rs.
310,000
364,500
54,500
Actual Variable Cost (600,000 – 290,000)
Std. cost for Actual Production (SHW x SR) (48,600 × .5 x 15*)
*(7.5 x 2)
F
54,500 F
Spending/Expenditure Variance
(S.R – A.R) × AHW
Efficiency
(SHW – AHW) × S.R
310,000 

15 * −
 × 25,000
25,000 

[(48,600 × 0.5) – 25,000] × 15
*(7.5 × 2)
65,000 F
10,500 U
Fixed Overheads Total Variance
Rs.
290,000
315,900
25,900
Actual Fixed OH (given)
Actual Production × Std. Rate (48,600 × 6.5)
F
25,900 F
Expenditure
Actual Fixed OH
Budgeted F-OH (45,000 × 6.5)
290,000
292,500
2,500 F
Volume
Budgeted F-OH (45,000 × 6.5)
Actual Production × S.R (48,600 × 6.5)
292,500
315,900
23,400 F
Page 16 of 78
The Dunya is literally just dirt. First under our feet, then over our bodies.
Capacity variance
Budgeted capacity hrs. × S.R =
(45,000 × 0.5 x 13*)
Actual consumed hrs. × S.R =
25,000 × 13
*6.5 x 2 = 13 / hr
Break up of volume variance
Efficiency variance
Actual consumed hrs. × S.R =
292,500
(25,000 × 13)
325,000
Std. hrs. for Actual production × S.R =
(48,600 × 0.5 × 13)
325,000
315,900
9,100 A
32,500 F
[not required for additional information]
If variable factory overheads and fixed overheads variances are to be calculated combined:
Total Factory OH Variance
Rs.
600,000
680,400
80,400
Actual Factory OH (310,000 + 290,000)
Actual Production × Std. Rate [48,600 × (7.5 + 6.5)]
F
80,400 F
Expenditure
Actual Factory OH
Less: Std. cost of F-OH
AHW × S.R (25,000 × 15)
Budgeted Prod. × S.R
(45,000 × 6.5)
V-OH Efficiency
Fixed OH Volume
10,500 A (as above)
23,400 F (as above)
600,000
375,000
292,500
667,500
67,500 F
32,500 F
9,100 A
Extra practice question Jack and Jill
Q.4 Hulk Limited (HL) produces and markets a single product. The company uses standard costing system.
Following is the standard cost card per unit of the finished product:
Direct material
Direct labour
Variable production overheads
Fixed production overheads
2.8 kg at Rs. 6.75 per kg
Rs. 150 per hour
Rs. 12 per direct labour hour
Rs. 18 per direct labour hour
The standard labour hours required for producing one unit of finished product is 30 minutes whereas HL’s
standard operating capacity per month is 15,000 hours.
Actual results for the month of February 2013 were as under:
Direct material @, RS. 6.25 per kg
Direct labour
Variable production overheads
Fixed production overheads
Rs. 504,000
Rs. 160 per hour
Rs. 175,000
Rs. 17 per direct labour hour
Actual labour hours consumed by HL for producing 27,000 units was 33 minutes per unit of finished product.
Required:
• Compute material, labour and overhead variances.
(14)
• List any four causes of unfavourable material price variance.
(02)
Page 17 of 78
Four variance method for overheads:
If a question requires four variance for overheads the following variances shall be calculated:
1. Calculate combined factory overheads expenditures variance (V OH and F OH expenditure)
2. Calculate variable OH efficiency variance as discussed previously, in exactly the same manner.
3. Calculate only the break up of fixed overheads volume variance; i.e subdivide it into:
• Fixed OH capacity variance
• Fixed OH efficiency variance
Discussion of Factory Overhead Expenditure Variance Combined (means sum of VOH Expenditure +
FOH Expenditure)
Data from ABC Ltd. At the end Q.6
Factory overheads expenditure Variance
VOH
Expenditure
(SR – AR) × AHW

= 25 −
26,000,000 
× 990,000 = 1,250,000 A
990,000 
OR
AHW × SR = 990,000 × 25 =

24,750,000
26,000,000
AHW × AR = 990,000 ×
= 26,000,000
990,000
Actual V-OH
1,250,000 A
Fixed OH
Expenditure
Actual fixed overheads
Budgeted fixed overheads
(500,000 × 10)
=
=
5,100,000
5,000,000
100,000 A
If suppose actual factory overheads are given combined e.g. factory overheads = 31,100 (26,000 + 5,100) or
question requires four overhead variances; then a combined factory overhead expenditure variance can be
calculated as follows:
Actual factory overheads
Less: Std. Cost of Factory overheads
From Variable overheads:
AHW × SR (990,000 × 25)
(Rs. 000)
31,100
From fixed overheads: Budget Production × SR (500,000 × 10)
24,750
5,000
29,750
1,250 A
Answer will be equal to sum of variable overheads expenditure and fixed
overheads expenditure variance
1,350
A
100 A
Page 18 of 78
‫بے شک ہللا ہر چیز پر قادر ہے‬
Similarly in Excellent Ltd.
Actual factory overheads (310,000 +290,000)
Less: Std. Cost of Factory overheads
From Variable overheads:
AHW × SR (25,000 x 15)
600,000
From fixed overheads: Budget Production × SR (45000 × 6.5)
292,500
375,000
667,500
65,000 F
Answer will be equal to sum of variable overheads expenditure and fixed
overheads expenditure variance
67,500
F
2,500 F
Q. 5 Hulk Limited (HL) produces and markets a single product. The company uses standard costing system.
Following is the standard cost card per unit of the finished product:
Direct material
Direct labour
2.8 kg at Rs. 6.75 per kg
Rs. 150 per hour
Variable production overheads
Fixed production overheads
Rs. 12 per direct labour hour
Rs. 18 per direct labour hour
The standard labour hours required for producing one unit of finished product is 30 minutes whereas HL’s
standard operating capacity per month is 15,000 hours.
Actual results for the month of February 2013 were as under:
Direct material @, RS. 6.25 per kg
Direct labour
Variable production overheads
Fixed production overheads
Rs. 504,000
Rs. 160 per hour
Rs. 175,000
Rs. 17 per direct labour hour
Actual labour hours consumed by HL for producing 27,000 units was 33 minutes per unit of finished product.
Required:
• Compute material, labour and overhead variances. Use four variance method (for overheads).
Q.6
SL operates at a normal capacity of 90% against its available annual capacity of 50,000 machine hours and
uses absorption costing.
Actual Production = 4,325 Units
Other Relevant Information:
Std. machine hrs / unit
Std. production OH Rate / Unit
Estimated Fixed Production Overheads at normal capacity
Actual Production OHs
Actual Machine hours
=
=
=
=
=
10 hrs.
2,000
3,600,000
8,750,000
44,000
(including 3,750,000 fixed)
Required:
Factory overhead variances in full detail
Second Scenario:
Same question except suppose that break-up of actual production overheads is not available and therefore
combined expenditure variance is to be calculated.
Page 19 of 78
Mix & Yield Variances
Material Total Variance

Price

Usage


Mix
Yield
(If material are substitutable i.e less of on type of
material can be compensated for by more of
another)
Material usage variance can be subdivided into material mix and yield variance, when more than one
material is used in a product.
Example: A company uses two materials F & B to manufacture a chemical. The standard material usage and
cost of one bottle of chemical are as follows
F
B
5 kg @ 2/kg
10 kg @ 3/kg
15 kg
10
30
40
In the month of March, 80 bottle of chemicals are produced from:
Scenarios
i)
450kgs of F and 750kg of B
ii)
410kgs of F and 820kgs of B; or
iii)
500kgs of F and 730kgs of B
i)
SQ in SM for AP AQ in AM for AP
F
400
450
(80 x 5)
B
800
750
(80 x 10)
(80 x 15)
1,200
1,200
No problem of quantity of materials used for output (yield) only problem, is quantity of materials have not
been mixed according to standard. So mix variances exist. (Problem of mixing of materials for output)
ii)
SQ in SM for AP AQ in AM for AP
F
400
410
(80 x 5)
B
800
820
(80 x 10)
(80 x 15)
1,200
1,230
No problem of mixing, mixing is in standard proportions but quantity of materials used for output is different
than what it should be. So Yield variance exist (problem of quantity of materials for output).
Page 20 of 78
ٰ ‫ہم اتنے عقلمند نہیں کہ ہللا‬،‫تقدیر کے لکھے پر کبھی شکوہ نہ کرو‬
‫تعالی کے ارادے کو سمجھ سکیں۔‬
iii)
SQ in SM for AP AQ in SM for AP AQ in AM for AP
F
400
410
500
(80 x 5)
(1,230 x 5/15)
B
800
820
730
(80 x 10)
(1,230 x 10/15)
(80 x 15)
1,200
1,230
1,230
In the above scenario, neither mix nor yield is standard so both variances.
A) Mix Variances (Problem of Mixing of materials for output)
It is the differences between:
1) How much actual materials should have been mixed according to standard mix for actual
production (AQU in SM for AP) and
2) How much actual materials have been actually mixed for actual production (AQU in AM for AP).
B) Yield Variance: (Problem of quantity of material used for output)
It is the difference between:
1) How much standard material in standard mix should have been used for actual production (SQU
in SM for AP) and
2) How much actual material in standard mix should have been used for actual production (AQU in
SM for AP)
As 1 in mix variance and 2 in yield variance are same so a table can be constructed as follows:
A
SQU in SM for AP
B
AQU in SM for AP
Yield Variance
(A - B) x SR
C
AQU in AM for AP
Mix Variance
(B - C) x SR
Usage Variance
(A - C) x SR
Usage Variance:
(A – C) × S.R
F
B
(400 – 500) × 2
(800 – 730) × 3
=
=
200
210
10
A
F
F
=
=
180
270
90
A
F
F
=
=
20
60
80
A
A
A
Mix Variance:
(B – C) × S.R
F
B
(410 – 500) × 2
(820 – 730) × 3
Yield Variance:
(A – B) × S.R
F
B
(400 – 410) × 2
(800 – 820) × 3
Page 21 of 78
Q.7
(a) Pelican Limited produces and markets a single product Zeta. The company uses a standard costing
system. Following is the standard material mix for the production of 400 Units of Zeta.
Weight (Kg.) Standard rate per Kg. (Rs.)
Material A
Material B
30
25
240
320
Actual costs on the production of 192 units of Zeta for the month of August 2011 were as follows:
Weight (Kg.) Actual rate per Kg. (Rs.)
Material A
Material B
16
13
230
308
Required:
Calculate the following material variances, from the above data:
(i) Cost variance
(ii) Price variance
(iii) Mix variance
(iv) Yield variance
(v) Usage variance
Q. 8
GHI Company produces 817 kg 'Y’ for which following standard chemical mix is used:
Material
A
B
C
Standard Qty (kg)
750
150
50
Standard Rate Per kg (Rs)
38.00
53.00
59.50
Purchase department, knowing the standard mix, made efforts for reducing the average price of material mix
and achieved the result as under;
Material
Rate
A
37.00
B
56.25
C
62.75
Production department concentrating on yield aspect experienced a different ratio of raw material mix and
got 876 kgs out of following mix:
Material
Qty (kgs)
A
B
C
750
185
65
Required:
Find out the effect off deviation from standards by calculating:
(a)
Price Variance
(b)
Mix Variance
(c)
Yield Variance
Page 22 of 78
57(‫ہر نفس نے موت کا مزہ چکھنا ہے اور پھر تم ہماری ہی طرف لوٹ کر آو گے۔ سورہ العنکبوت آیت نمبر‬
Q.9
The standard raw material mix for 2200 kgs of finished product is as follows:
Materials
Weight (Kgs)
Price per Kg (Rs )
Salt
1,200
1.50
Ash
600
2.00
Coata
200
3.00
Fog
400
4.00
Materials used during an accounting period were as follows:
Materials
Weight (Kg)
Price per Kg (Rs.)
Salt
6,000
1.60
Ash
4,800
1.80
Coata
1,600
2.60
Fog
2,500
4.10
Actual production was 12,100 kg calculate the following materials variances:
(a)
Cost variance
(b)
Price variance
(c)
Usage variance
(d)
Mix variance
(e)
Yield variance
Discussion of marginal and absorption costing:
Income Statement (Absorption Costing)
(Fixed Cost is a Product Cost [means absorbed into product])
Rs.
Sales
Cost of sales:
Opening Stock
Add: Cost of goods manufactured
Direct material
Direct labor
Variable OH
Fixed OH
Closing Stock
Gross Profit
Admin Expenses
Selling Expenses
Net Profit
Rs.
--
------(--)
--(--)
(--)
--
Income Statement (Marginal Costing)
(Fixed Cost is a Period Cost (not absorbed)
Rs.
Sales
Variable Cost of sales:
Opening Stock
Add: Variable Cost of goods manufactured
Direct material
Direct labor
Variable OH
Closing stock
Gross Contribution
Variable Selling & Admin
Net Contribution
Fixed Cost:
Rs.
--
-----(--)
--(--)
(--)
Page 23 of 78
Production
Admin & selling
Net Profit
(--)
(--)
--
Note:Difference in profit will be only because of fixed cost within stocks; in case of absorption costing.
STANDARD MARGINAL COSTING:
Previous discussion relates to companies; using standard total absorption costing.
Now we discuss what happens when a company uses std. marginal costing instead.
Marginal costing variances are calculated exactly as before with two important differences:
(a)
Sales Volume Variance is calculated as follows:
(Budgeted Units Sold – Actual Units Sold) × Std. Contribution / Unit*
*(Std. Contribution / Unit = Sale price / Unit – Variable Cost / Unit)
(b)
In marginal costing, fixed costs are not absorbed into product costs and so there is no fixed cost variance
to explain any under / over absorption of overheads. There will therefore be no fixed overheads volume
variance (and if no volume variance then no subdivision will be relevant). There will only be fixed overhead
expenditure variance which is calculated in exactly the same way as for absorption costing system.
CARAT At the end
solution
(a)
Contribution / Unit:
Standard Sale Price =
Material A (1.7 × 2.5)
Material B (1.2 × 1.5)
Labour (1.6 × 0.45)
12
4.25
1.80
2.70
(8.75)
3.25
Contribution
Sales
Volume
(BQS – AQS) × Std. Cont./unit
Price
(SR – AR) × AQS
580,800 

12 −
 × 48,000
48,000 

4,800 F
(50,000 – 48,000) × 3.25
6,500 A
Material
Price
Material Mix & Yield
(SR – AR) × AQU
A

 1.7

B

 1.2

−
−
200,000 

121,951 
84,000 

67,200 
× 121,951
× 67,200
7,317 F
SQU in SM for
AP
AQU in SM for
AP
AQU in AM for
AP
A
120,000
(48,000×2.5)
118,219
(189,151×2.5/4)
121,951
B
72,000
(48,000×1.5)
70,932
(189,151×1.5/4)
67,200
192,000
189,151
189,151
3,360 A
Y
Yield Variance
M
Mix Variance
A
(120,000 – 118,219) × 1.7
3,028 F
A
(118,219 – 121,951) × 1.7
6,344 A
B
(72,000 – 70,932) × 1.2
1,282 F
B
(70,932 – 67,200) × 1.2
4,478 F
4,310 F
1,866 A
Page 24 of 78
Whoever believes in ALLAH and last day (i.e. Akhirah) should not hurt his neighbor [Al-Hadith].
Labour
Rate
(SR – AR) × AHP
117,120 

 6 −
 × 19,200
19,200 

1,920 A
Idle time
(AHP – AHW) × S.R
Efficiency
(SHW – AHW) × S.R
(19,200 – 18,900) × 6
[(48,000 × 0.45) – 18,900] × 6
1,800 A
16,200 F
Fixed OH Expenditure Variance
Budgeted F-OH
Actual F-OH
62,500
64,000
1,500 A
Operating Statement
Budgeted Profit (50,000 × 3.25) – 62,500
Budgeted Fixed Cost
Budgeted Contribution
100,000
62,500
162,500
Sale Volume Variance
Sale price Variance
6,500 A
4,800 F
160,800
Cost Variances:
Material Price A
Material Price B
Material Mix
Material Yield
Labour Rate
Idle Time
Labour Efficiency
Actual Contribution
7,317 F
3,360 A
1,866 A
4,309 F
1,920 A
1,800 A
16,200 F
179,680
Budgeted F-OH
F-OH Expenditure Variance
Actual F-OH
Actual Profit
62,500
1,500 A
64,000
115,680
Actual Profit:
Sales
Material A
Material B
Labour
Actual Contribution
Fixed OH
Actual Profit
580,800
200,000
84,000
117,120
179,680
(64,000)
115,680
Part c
Possible explanations for the following variances are discussed below:
i.
material price, mix and yield variances for material A;
ii.
labor rate, labor efficiency and idle time variances.
The favorable material A price variance indicates that the actual price per kilogram was less than standard.
Possible explanations include buying lower quality material, buying larger quantities of material A and thereby
gaining bulk purchase discounts, a change of supplier, and using an out-of-date standard.
The adverse material A mix variance indicates that more of this material was used in the actual input than
indicated by the standard mix. The favorable material price variance suggests this may be due to the use of
poorer quality material (hence more was needed than in the standard mix), or it might be that more material A
was used because it was cheaper than expected.
Page 25 of 78
The favorable material A yield variance indicates that more output was produced from the quantity of material
used than expected by the standard. This increase in yield is unlikely to be due to the use of poorer quality
material: it is more likely to be the result of employing more skilled labor, or introducing more efficient working
practices.
It is only appropriate to calculate and interpret material mix and yield variances if quantities in the standard mix
can be varied. It has also been argued that calculating yield variances for each material is not useful, as yield
is related to output overall rather than to particular materials in the input mix. A further complication is that mix
variances for individual materials are inter- related and so an explanation of the increased use of one material
cannot be separated from an explanation of the decreased use of another.
The unfavorable labor rate variance indicates that the actual hourly rate paid was higher than standard.
Possible explanations for this include hiring staff with more experience and paying them more (this is consistent
with the favorable overall direct material variance), or implementing an unexpected pay increase. The
favorable labor efficiency variance shows that fewer hours were worked than standard. Possible
explanations include the effect of staff training, the use of better quality material (possibly on Material B
rather than on Material A), employees gaining experience of the production process, and introducing more
efficient production methods. The adverse idle time variance may be due to machine breakdowns; or a
higher rate of production arising from more efficient working (assuming employees are paid a fixed number
of hours per week).
Lettuce At the end (Marginal Costing)
Solution:
(a)
Budgeted Profit
Budgeted Fixed Cost
Budgeted Contribution
(W-1)
5,700
6,000
11,700
Sale Price
Sale Volume
Variable Cost Variances:
Material Price
Material Usage
Labour Rate
Labour Efficiency
V OH. Expenditure
V OH. Efficiency
Actual Contribution
Budgeted Fixed Cost
Fixed Overhead Expenditure
Actual Loss
2,200 F
1,800 A
3,300 A
3,200 A
180 F
1,200 A
900 A
900 A
2,780
6,000
2,000 F
(4,000)
(1,220)
(W 2)
Calculation of variances:
Sale
(BR – AR) × AQS
(BQS – AQS) × Std
Contribuiton/unit
57,200 

 50 −
 × 1,100
1,100 

(1,300 – 1,100) × 9
2,200 F
1,800 A
Material
(SR – AR) × AQP
(SQU – AQU) × SR
29,700 

4 −
 × 6,600
6,600 

[(1,100 × 5) – 6,300) × 4
3,300 A
3,200 A
Page 26 of 78
Whoever believes in ALLAH and last day (i.e. Akhirah) should serves his guests generously [Al-Hadith]
Labour
(SR – AR) × AHW
(SHW for AP – AHW) × SR
14,220 

4 −
 × 3,600
3,600 

(1,100 × 3 – 3,600) × 4
180 F
1,200 A
VOH
(SR – AR) × AHW
(SHW – AHW) × SR
11,700 

3 −
 × 3,600
3,600 

[(1,100 × 3) – 3,600) × 3
900 A
900 A
FOH
Budgeted FOH
Actual F OH
6,000
4,000
2,000 F
No Volume Variance
WORKING:
W-1
Budgeted Profit (Marginal costing)
Sales (1,300 × 50)
V. Cost of Sales
Opening Stock
Cost of goods manufactured:
Material 1,300 × 20
Labour 1,300 × 12
VOH 1,300 × 9
65,000
26,000
15,600
11,700
(53,300)
11,700
Gross Contribution
Fixed Cost
Budgeted profit
6,000
5,700
OR
* Sale price per unit
Variable cost per unit
Contribution per unit
50
41
9
(1,300 × 9)
Fixed Cost
Budgeted profit
W 2 ACTUAL PROFIT/LOSS
Sales
Less: Variable Cost of sales
Opening Stock
Cost of goods manufactured:
Raw Material Purchase
Closing Stock (300 × 4)
Direct Labour
VOH
11,700
6,000
5,700
57,200
-29,700
(1,200)
28,500
(14,220)
(11,700)
(54,420)
Page 27 of 78
Contribution
Fixed Cost
Actual Loss
2,780
(4,000)
(1,220)
(b)
If company uses absorption costing with a direct labour hour absorption rate, we can calculate a fixed
overheads volume variance and then can sub-divide it.
The first step is to calculate budgeted absorption rate / hour.
Budgeted labour hours
= 1,300 × 3
Budgeted fixed cost
= 6,000
Budgeted Absorption rate
= 6,000 / 3,900
= 3,900 hrs.
= 1.54/hr
OR 6,000/1,300 = 4.61/unit (1.54 * 3)
Fixed OH Expenditure Variance will be same
Volume Variance
1,300 × 4.61
6,000
1,100 × 4.61
5,077
923 A
923 A
Capacity
1,300 × 3 × 1.54
6,006
3,600 × 1.54
5,544
462A





Efficiency
3,600 × 1.54
1,100 × 3 × 1.54
5,544
5,082
462 A
AQP = AQU ; Unless there is some stock of raw material left.
If raw material stock are measured at std. cost then material price variance is calculated by using actual
quantity purchased. [10.7 lettuce].
If however raw material stock is measured at actual cost then price variance should be calculated by
using actual quantity used.
[lettuce same question except that raw stocks are to be measured at actual cost] (solution attached).
If nothing is mentioned then assume stocks are measured at actual cost (and therefore price variance
should be on the basis of AQU)
10.7
Solution of same above question assuming as if raw material stock is measured at actual cost then:
Operating Statement
Budgeted Profit
Budgeted Fixed Cost
Budgeted Contribution
5,700
6,000
11,700
Sale Volume Variance
Sale Price Variance
2,200 F
1,800 A
Variable Cost Variances:
29,700 

Material Price  4 −
 × 6,300 = 3,150 A
6,600 

Material Usage
Labour Rate
Labour Efficiency
V-OH Expenditure
V-OH Efficiency
Actual Contribution
Budgeted Fixed Cost
F-OH Expenditure Variance
Actual Loss (Working below)
3,150 A
3,200 A
180 F
1,200 A
900 A
900 A
2,930
6,000
2,000 F
(4,000)
(1,070)
Page 28 of 78
Whoever believes in ALLAH and last day (i.e. Akhirah) should speak what is good or keep silent [Al-Hadith].
Working of Actual Profit / Loss
Sales
Variable cost of sale:
Material
Closing Stock
*
57,200
29,700
(300  4.5*)
29,700
6,600
(1,350)
Labour
V-OH
Actual Contribution
Fixed Cost
Actual Loss
(28,350)
(14,220)
(11,700)
2,930
(4,000)
(1,070)
Reverse working:
Calculation of Std. costs from variances and actual cost:
At the end standard cost sheet
Solution:
Standard Cost Card:
Direct Material (8 @ 1.5)
Direct labour (2 @ 4)
Variable overheads (2 @ 1)
Std. Marginal Cost
12.0
8.0
2.0
22.0
Workings:
Material (8 × 1.5) = 12
(SR – AR) × AQU
(SQU – AQU) × S.R
210,000 

 x − 150,000  × 150,000 = 15,000 F


(x – 150,000) × 1.5 = (9,000) A
x 150,000 – 210,000 = 15,000 F
x = 1.5
1.5 x – 225,000 = (9,000)
X = 144,000 kg.
So per unit std. quantity will be 144,000
18,000 = 8 kg.
Labour (2 × 4) = 8
(SR – AR) × AHW
(SHW – AHW) × S.R
136,000 

x −
 × 32,000
32,000 

(x – 32,000) × 4 = 16,000 F
(x – 4.5) × 32,000
32,000 x – 136,000 = (8,000)
x=4
4x – 128,000 = 16,000
x = 36,000 ÷ 18,000
x=2
V-OH (2 × 1) = 2
(SR – AR) × AHW
(SHW – AHW) × S.R
38,000 

x −
 × 32,000 = (6,000)
32,000 

(x – 32,000) × 1 = 4,000
32,000 x – 38,000 = (6,000)
x = 1/hr.
x = 36,000
36,000 / 18,000 = 2
Page 29 of 78
Example:
The standard direct material cost of product X is Rs. 96 (16 kgs × Rs. 6 per kg) and the standard direct labour
cost is Rs. 72 (6 hours × Rs. 12 per hour). The following variances were among those reported in relation to
product X.
Direct material price: Rs. 18,840 favourable; Direct labour rate: Rs. 10,580 adverse
Direct material usage: Rs. 480 adverse;
Direct labour efficiency: Rs. 8,478 favourable
Actual direct wages cost Rs. 171,320 and Rs. 5.50 was paid for each kg of direct material. There was no opening
or closing stocks of the material.
Required:
Calculate the following:
(a)
Actual output.
(b)
Actual hours worked.
(c)
Average actual wage rate per hour.
(d)
Actual number of kilograms purchased and used.
Solution of Example
Material
Price Variance
Usage Variance
(SQU – AQU) × S.R
(SR – AR) × AQU
18,840 = (6 – 5.5) × AQU
18,840 = 0.5 × AQU
18,840
AQU =
= 37,680 kg. (d)
0 .5
(480) = (SQU – AQU) × S.R
(480) = (SQU – 37,680) × 6
= 6 SQU – 226,080
6 SQU = 225,600
SQU = 37,600 kgs.
Per unit kgs = 16
So actual units = 2,350 (a)
Labour
Rate Variance
(SR – AR) × AHW
(10,580) = (S.R – AHW) – (AR × AHW)
(10,580) = (12 – AHW) – 171,320
12 AHW = 171,320 – 10,580
12 AHW = 160,740
AHW = 13,395 hours (b)
Efficiency Variance
(SHW – AHW) × S.R
8,478 = (SHW – 13,395) × 12
8,478 = 12 SHW – 160,740
12 SHW = 169,218
SHW = 169,218/12
= 14,101.5 hours
Per unit hours = 6 hrs.
So actual units = 2,350 (a)
Average Actual Wages Rate = 171,320 ÷ 13,395
= 12.79 hours (c)
Page 30 of 78
Being grateful is not just an Act of saying ALHAMDULILAH. Being grateful is an
attitude. It’s a life style. It is a way of thinking.
Q. 10 You have recently been appointed as the Financial Controller of Watool Limited. Your immediate task is
to prepare a presentation on the company’s performance for the recently concluded year. You have noticed
that the records related to cost of production have not been maintained properly. However, while scrutinizing
the files you have come across certain details prepared by your predecessor which are as follows:
i)
Annual production was 50,000 units which is equal to the designed capacity of the plant.
ii)
The standard cost per unit of finished product is as follows:
Raw material X
6 kg at Rs. 50 per kg
Raw material Y
3 kg at Rs. 30 per kg
Labour- skilled
1.5 hours at Rs. 150 per hour
Labour- unskilled
2 hours at Rs. 100 per hour
Factory overheads Variable overheads per hour are Rs. 100 for skilled labour and Rs.
80 for unskilled labour. Fixed overheads are Rs. 4,000,000.
Data related to variation in cost of materials is as under:
Material X price variance
Rs. 95,000 (Adverse)
Material Y actual price
6% below the standard price
Material X quantity variance
Nil
Material Y quantity variance
Rs. 150,000 (Adverse)
•
Opening raw material inventories comprised of 25 days of standard consumption whereas closing
inventories comprised of 20 days of standard consumption.
• Actual labour rate for skilled and unskilled workers was 10% and 5% higher respectively.
• Actual hours worked by the workers were 168,000 and the ratio of skilled and unskilled labour hours
was 3:4 respectively.
• Actual variable overheads during the year amounted to Rs. 16,680,000. Fixed overheads were 6%
more than the budgeted amount.
• Raw material stocks are measured at standard costs.
.
Required:
• Actual purchases of each type of raw materials.
• Labour and overhead variances.
Q. 11 Hexa Limited is a manufacturer of various machine parts. Following information has been extracted from
the cost records of one of its products AXE for the month of June 2014:
Standard cost per unit:
Rupees
Raw material
170.00
Direct labour (1.25 hours)
150.00
Overheads
137.50
i)
Based on normal capacity of 128,000 direct labour hours, fixed overheads are estimated at Rs.
2,560,000.
Following information pertains to production of 100,000 units of product AXE:
Actual direct labour hours worked
130,000
Unfavorable material usage variance
Rs.
820,000
Unfavorable material price variance
Rs.
600,000
Actual direct labour cost
Rs.
16,250,000
Actual fixed and variable overheads (fixed:
2,500,000)
Rs.
15,500,000
Required:
Compute the following for the month of June 2014:
(a) Actual material cost
(02)
(b) Labour variances
(04)
(c) Overhead variances
(10)
Page 31 of 78
Q. 12 Hexa Limited is a manufacturer of various machine parts. Following information has been extracted from
the cost records of one of its products AXE for the month of June 2014:
Standard cost per unit:
Rupees
Raw material
170.00
Direct labour (1.25 hours)
Overheads
150.00
137.50
Based on normal capacity of 128,000 direct labour hours, fixed overheads are estimated at Rs. 2,560,000.
Following information pertains to production of 100,000 units of product AXE:
Actual direct labour hours worked
130,000
Unfavorable material usage variance
Rs.
820,000
Unfavorable material price variance
Rs.
600,000
Actual direct labour cost
Rs.
16,250,000
Actual fixed and variable overheads
Rs.
15,500,000
Required:
Compute the following for the month of June 2014:
(a) Actual material cost
(b) Labour variances
(c) Overhead variances, using four variance method
(02)
(04)
(10)
Page 32 of 78
Being a Muslim is more than just going to the Masjid: ALLAH wants your “attention” not just your “attendance”.
Solution:
A.1
(a)
Material Price Variance
(SR – AR) × AQU
(48 – 50) × 5,900 = 11,800 A
(b)
Material Usage Variance
(SQU for Actual Production – AQU) × S.R
(100 × 60 – 5,900) × 48
= 4,800 F
(c)
Labour Wage Rate Variance
(SR – AR) × AHW
(8 – 9) × 47,500
47,500 A
(d)
Labour Efficiency Variance
(SHW for Actual Production - AHW) × S.R
(100 x 480 – 47,500) × 8
4,000 F
(B)
Reconciliation of Material Cost:
Std Material Cost (100 × 60 × 48)
Material Price Variance
Material Usage Variance
Actual Material Cost (5,900 × 50)
=
=
=
288,000
11,800
(4,800)
295,000
A
F
Reconciliation of Material Cost:
Std Labour Cost (100 × 480 × 8)
Labour Rate Variance
Labour Efficiency Variance
Actual Labour Cost (47,500 × 9)
=
=
=
384,000
47,500
(4,000)
427,500
A
F
A.2
M/s Gamma & Son
Material Total Cost Variance
(i)
For Actual
Production
SQU × S.R
AQU × A.R
[9,500 × 4 × 3]
120,000
114,000
6,000 U
Usage Variance
(SQU – AQU) × S.R
(38,000 – 37,000) × 3
3,000 F
Price Variance
(SR – AR) × AQU
(3 –
120,000
) × 37,000
37,000
9,000 U
Page 33 of 78
(ii)
Labour Total Cost Variance
SHW × S.R
9,500 × 5 × 4
190,000
AHW × A/R
200,000
10,000 U
Efficiency Variance
(SHW – AHW) × S.R
Rate Variance
(SR – AR) × AHW
(9,500 × 5 – 49,000) × 4
200,000 

4 − 49,000  × 49,000


6,000 U
4,000 U
(iii)
Variable Overheads Total Cost Variance
Std. Cost for Actual Production
SHW for A.P × S.R
(9,500 × 5 × 1) - 47,500
(AHW × A.R) Actual Cost
47,000
500 F
Efficiency Variance
[SH for Actual production – AHW]×S.R
Spending / Expenditure Variance
[SR – AR] × AHW
[9,500 × 5 - 49,000] × 1*
47,000 

1 − 49,000  × 49,000


1,500 U
2,000 F
*(5 ÷ 5)
(iv)
Fixed Overheads Total Cost Variance
Actual Fixed Overheads
145,000
Actual production × Std. Rate
95,000 × 15 = 142,500
2,500 U
Under applied (Means Actual Expense is More)
Expenditure
[Actual F-OH – Budgeted F-OH]
145,000 – 10,000 × 15
5,000 F
Volume
[Budgeted F-OH – Actual Production × S.R]
10,000 × 15 – 9,500 × 15
150,000 – 142,500
7,500 U
Page 34 of 78
O My ALLAH! Truly I am in need of whatever good that you bestow on me [28:24]
[Not required for additional information]
If variable overhead variances and fixed overhead variances are to be calculated combined:
Total Factory OH Variance (V – OH + F – OH):
Actual Factory OHs (47,000 + 145,000)
=
192,000
Applied Factory OHs (Actual Production =
190,000
× S.R ) (9,500 × 20*)
*(5 +15)
2,000
V-OHs Efficiency variance
[SHW for A.P – AHW × S.R]
(95,000 × 5 – 49,000) × 1
1,500 A
A (Under Applied)
Fixed OH Volume variance
Budgeted Fixed OH (100,000×15)
=
Actual production × S.R (9,500 × 15) =
=
150,000
142,500
7,500
A
Factory OH Expenditure
Variance
Actual
Factory
192,000
overheads =
Std. cost of Factory
OH:
AHW × S.R = 49,000 ×
1=
budgeted production ×
S.R
(10,000 × 15)
49,000
150,000
199,000
7,000
2000 F
F
Problem in setting is to be resolved
5,000 F
A.3
Material Variance
Material A
Price
Usage
159,900 

20 − 7,800  × 7,800


[(800 × 10) – 7,800] × 20
3,900 A
4,000 F
Material B
Price
Usage
23,650

6 − 4,300  × 4,300


[(800 × 5) – 4,300] × 6
2,150 F
1,800 A
Page 35 of 78
Labour Variances
Rate
Efficiency
24,150

6 − 4,200  ×4,200


[(800 × 5) – 4,200] × 6
1,050 F
1,200 A
a) Fixed OH Variance
Total Variance
F-OH Expenditure Variance
Actual
Budgeted (900 × 50)
=
=
Actual – Applied
47,000 – 800 × 50
7,000 A
=
=
=
47,000
45,000
2,000 A
F-OH Volume Variance
Budgeted (900 × 50)
=
Actual production × S.R (800×50)
=
45,000
40,000
5,000 A
Break up of Volume variance
F-OH Capacity Variance
Budgeted capacity hrs × S.R = 900×5 ×10
=
Actual Consumed hrs × S.R = 4,200×10 =
F-OH Efficiency Variance
45,000
Actual Consumed hrs × S.R = 4,200 × 10 =
42,000
42,000
Std. hrs for Actual prod.× S.R = 800×5×10 =
40,000
3,000 A
2,000 A
A.4
(a)
Material
Price
(6.75 – 6.25) × 80,640
40,320 F
Usage
(27,000 × 2.8 – 8,640) × 6.75
34,020 A
Labour
Rate
Efficiency
(150 – 160) × 14,850
 (27,000)

 30 − 14,850 × 150
 60


148,500 A
202,500 A
Total Variable OH variance:
(SHW for A.P × S.R) – (AHW × A.R)
(27,000 × 0.5 × 12) – 175,000 =
175,000 

12 − 14,850   14,850


3,200 F
13,000 A
[13,500 – 14,850] × 12
16,200 A
Page 36 of 78
There is no might nor power except in ALLAH.
Total Fixed OH variance:
Rs.
Actual = 14,850 × 17 = 252,450
Applied = 27,000 × 18/2 = 243,000
9,450
A
9,450 A
Expenditure
Actual (14,850 × 17)
Budgeted (30,000 × 9)
Volume
252,450
270,000
17,550 F
Budgeted (30,000 × 9)
Applied (27,000 × 18/2)
270,000
243,000
27,000 A
27,000 A
Capacity
15,000 × 18
14,850 × 18
Efficiency
270,000
267,300
2,700 A
14,850 × 18
13,500* × 18
267,300
243,000
24,300 A
*(27,000 × 30/60)
(b)
Unfavourable price variance may be caused by:
•
Inaccurate Std. prices
•
Inflationary cost increases
•
Scarcity in raw material supplies resulting in higher prices
•
Purchase department inefficiency
•
Purchase of better quality products.
A. 5
HULK Limited (by Using Four Variances)
Material Variance
(6.75 – 6.25) × 80,640
40,320 F
(27,000 × 2.8 – 80,640) × 6.75
34,020 A
Labour Variance
(150 – 160) × 14,850
 27,000


 30  − 14,850 × 150


 60

148,500 A
202,500 A
Factory Overhead Variance (Four Variances)
(i)
Factory Overhead Expenditure Variance
Actual (175,000 + 14,850* × 17) *[27,000 x 33 / 60 = 14,850 hours]
Less: Std. Cost of Factory OHs
AHW × S.R (27,000 × 0.55 × 12)
Budgeted Production × S.R (30,000* × 18/12)
*(15,000 × 2)
=
=
=
Rs.
427,450
178,200
270,000
448,200
20,750
F
Page 37 of 78
20,750 F
3,200 F
(ii)
17,550 F
V-OH Efficiency Variance
= (13,500 – 14,850) × 12
= 16,200 A
(iii)
(iv)
Fixed OH Capacity Variance:
15,000 × 18
14,850 × 18
Fixed OH Efficiency Variance:
14,850 × 18
13,500* × 18
* (27,000 ÷ 2)
=
=
270,000
267,300
2,700 A
=
=
267,300
243,000
24,300 A
[Not required just for additional information]
Hulk Limited
Total factory OH variance
Actual F-OH = 427,450 [175,000 + ( 27,000
33
17 )]
60
Actual Production x S.R = 40,500
27,000 [(12 + 18) 
30
]
60
22,450A
Expenditure Variance
Actual F-OH
427,450
Std. cost of F-OH:
(AHW x S.R)
14,850 x 12
178,200
Budgeted F-OH
(Bud. Prod x S.R) 270,000
(30,000 x 18/2)
448,200
20,750 F
3,200 F
V-OH Efficiency
135,000 x 12 = 162,000
14,850 x 12 = 178,200
16,200A
F-OH
Volume
27,000A
(as previous)
17,550 F
Page 38 of 78
ALHAMDULILAH for the chances ALLAH has given us to be able to ask for forgiveness.
A.6
Total Variable OH Variance
(SHW for A.P × S.R) – (AHW × A.R)
5,000,000 

(4,325 × 10 × 120) –  44,000 

44,000 

5,190,000 – 5,000,000 = 190,000 F
190,000 F
Expenditure
Efficiency
5,000,000 

120 
 × 44,000
44,000 

280,000 F
(4,325
OR
AHW × S.R = 44,000 × 120 =
Actual VOH =
 10 − 44,000) × 120
90,000 A
5,250,000
5,000,000
280,000 F
Total Fixed OHs variance:
Actual Fixed OHs
Actual Production × S.R (4,325 × 800)
3,750,000
3,460,000
290,000 A
290,000 A
Expenditure
Budgeted F-OH (4,500* x 800)
Volume
3,600,000
Budgeted F-OH (4,500 × 800)
Actual F-OH =
3,750,000
Actual Production × S.R (4,325×800)
*45,000 / 10 = 4,500
150,000 A
3,600,000
3,460,000
140,000 A
140,000 A
Capacity
Efficiency
45,000 × 80
3,600,000
44,000 × 80
3,520,000
44,000 × 80
3,520,000
4,325 × 10 × 80
3,460,000
80,000 A
Std. rate
Factory OH/Unit = 2,000 ÷ 10 =
Fixed OH rate / hr = 3,600,000 ÷ 45,000 =
Variable OH rate / hr. (200 – 80) =
Fixed OH rate / unit = 80 × 10 =
Variable OH rate / unit = 120 × 10 =
Total factory overheads rate per unit
60,000 A
200/hrs.
80/hr.
120/ hr.
800
1,200
2,000
Page 39 of 78
A. Second Scenario:
Actual factory overheads
=
Less: Std. Cost of Factory OHs
AHW × S.R (44,000 x 120)
Budgeted Production × S.R (4,500 x 800)
=
=
Total OH Variance (V-OH + F –OH) (for additional infformation)
Actual F-OH =
Applied F-OH (4,325 × 2,000) =
Rs.
8,750,000
5,280,000
3,600,000
8,880,000
130,000 F
8,750,000
8,650,000
190,000F
100,000 A
290,000 A
100,000 A
Expenditure
Actual F-OH
V-OH Efficiency
8,750
90,000 A (as above)
F-OH Volume
140,000 A (as above)
Less: Std. Cost of F-OH:
AHW × S.R (44,000 × 120)
5,280
Budgeted F-OH (4,500×800)
3,600
8,880
130 F
280 F
150 A
A.7
(1)
Material Cost Variance (Material total Variance) (SQU x SR) – (AQU x AR):
 192  240 - [16 × 230] = 224 U
A 30
400
388 U
 192  320 - [13 × 308] = 164 U
B 25
400
(2)
Price Variance (SR -AR) x AQU
A (240 – 230) × 16 = 160 F




316 F
B (320 – 308) × 13 = 156 F
(3)
Usage Variance: (SQU - AQU) x SR
 192 − 16 × 240 = 384 U
A 30
400


 192 − 13 × 320 = 320 U
B 25
400
704 U
(4) & (5) Mix & Yield Variance
1
A
30
B
25
400
400
2
3
× 192 =
14.4
15.82
(30/55 × 29)
16
× 192 =
12
13.18
(25/55 × 29)
13
26.4
29
29
Yield variance:
A (14.4 – 15.82) x 240 = 341 A
B (12 – 13.18) x 320
= 378 A
719 A
Page 40 of 78
The DUNIYA is not the RESTING place it is the TESTING place.
Mix variance:
A (15.82 - 16) x 240 = 43.2 A
B (13.18 - 13) x 320 =57.6 F
14.4 F
A. 8
Material Cost Variance
SQU X .S.R  AQU  A.R

−


 






A  750817  876  38  − 750  37  = 30,552 − 27,750 = 2,802F


B  150
 876  53  − 185  56.25 = 8,533 − 10,406 = 1,873U
817


3,213 − 4,079 = 866U
C  50
 876  59.5 −  65  62.75 =
 817

63F

63F
Price
[S.R – A.R] × AQU
Usage
[SQU – AQU] × SR
A [38 – 37] × 750 =
750 817  876− 750  38 =
 876− 785  53 =
B  150
817
 876− 65  59.5 =
C  50
817
A
750 F
B [53 – 56.25] × 185 =
601.25 U
C [59.5 – 62.75] × 65 =
211.25 U
62.5 U
2,052 F
1,272 U
654.50 U
125.5 F
125.5F
(A)
SQ in Std Mix for Actual
Production
750
150
50
817
817
817
(B)
AQ in Std. Mix for Actual
Product
750
× 876 =
804
1,000 ×
× 876 =
161
1,000 × 150
54
1,000 × 50
× 876 =
950
950
950
1,019
Yield Variance (A – B) × S.R
A [804 – 789] × 38 =
B [161 – 158] × 53 =
C [54 – 53] × 59.5 =
=
(C)
AQ in Actual Mix for Actual
Production
=
789
750
=
158
185
53
65
1,000
570 F
159 F
59.5 F
788.5 F
1,000
Mix Variance (B – C) × S.R
[789 – 750] × 38 =
[158 – 185] × 53 =
[53 – 65] × 59.5 =
1,482 F
1,431 U
714 U
663 U
Page 41 of 78
A.9
(i)
Material Cost Variance:
S
(1,200/2,200 × 12,100 × 1.5)
A
(600/2,200 × 12,100 × 2)
C
(200/2,200 × 12,100 × 3)
F
(400/2,200 × 12,100 × 4)
–
–
–
–
(6,000 × 1.6)
(4,800 × 1.8)
(1,600 × 2.6)
(2,500 × 4.1)
=
=
=
=
300
2040
860
1,450
4,050
F
U
U
U
U
4,050 U
Price Variance
Usage Variance

S [1.5 – 1.6] × 6,000 =
600 U
S 1,200
A [2 – 1.8] × 4,800 =
960 F
A 600
C [3 – 2.6] × 1,600 =
640 F
C 200
F [4 – 4.1] × 2,500 =
250 U
F 400



2,200
2, 200

 12,100 − 4,800 × 2 =
2,200
2,200

 12,100 − 6,000 × 1.5 =
900 F
3,000 U


 12,100 − 1,600 × 3 =
1,500 U
 12,100 − 2,500 × 4 =
1,200 U
750 F
4,800 U
4,800 U
SQ in SM for AP
S 1,200
A 600
C 400
F 400
6,600
1,200
× 12,100 =
3,300
600
× 12,100 =
1,100
200
× 12,100 =
2,200
400
2,200 × 12,100 =
2,200
2,200
2,200
AQ in SM for AP
2,400 × 14,900 =
2,400
2,400
2,400
AQ in AM for AP
7,450
6,000
× 14,900 =
3,725
4,800
× 14,900 =
1,242
1,600
× 14,900 =
2,483
2500
14,900
14,900
13,200
Yield
(ii)
Mix
Mix Variance:
S
(7,450 – 6,000)
A
(3,725 – 4,800)
C
(1,242 – 1,600)
F
(2,483 – 2,500)
× 1.5
×2
×3
×4
=
=
=
=
2,175
2,150
1,074
68
1,117
F
A
A
A
A
Yield Variance:
S
(6,600 – 7,450)
A
(3,300 – 3,725)
C
(1,100 – 1,242)
F
(2,200 – 2,483)
× 1.5
×2
×3
×4
=
=
=
=
1,275
850
426
1,132
3,683
A
A
A
A
A
Page 42 of 78
The road to Jannah is not easy, but ALLAH will be with that who have patience.
A.10
(a)
Material X:
Price Variance
=
95,000 A
Quantity Variance
=
NIL
Opening RM Inventory
=
50,000  6
365
× 25 = 20,548 kgs.
Closing RM Inventory
=
50,000  6
365
× 20 = 16,438 kgs.
Material Quantity Variance (usage)
=
(SQU for Actual Production – AQU) × S.R
0
=
(50,000 × 6 – AQU) × 50
=
(300,000 – AQU) × 50
50 AQU
=
15,000,000
AQU
=
15,000,000 ÷ 50
=
300,000 kgs.
=
Consumed + Closing – Opening
=
300,000 + 16,438 – 20,548
=
295,890 kgs.
Also material price variance
=
(SR – AR) × AQP
(95,000)
=
(50 – AR) × 295,890
(95,000)
=
14,794,500 – 295,890 A.R
295,890 AR
=
14,794,500 + 95,000
AR
=
14,889,500
295,890
Actual Rate
=
50.32
Actual Purchase
=
295,890 × 50.32 = 14,889,500.
Material Y:
Quantity Variance
=
150,000 A
Opening RM
=
50,000  3
× 25 = 10,274 kgs.
365
Closing RM
=
50,000  3
× 20 = 8,219 kgs.
365
Material Quantity Variance (usage)
=
(SQU for Actual Production – AQU)×S.R Rate prod.
(150,000)
=
(50,000 × 3 – AQU) × 30
(150,000)
=
(150,000 – AQU) × 30
(150,000)
=
4,500,000 – 30 AQU
30 AQU
=
4,500,000 + 150,000
AQU
=
155,000 kgs
Quantity Purchased
=
Consumed + Closing – Opening
=
155,000 + 8,219 – 10,274
=
152,945 kgs.
Std. Price of Y
=
30/kg.
Actual Price of Y
=
30 × 94% = 28.2/kg.
Therefore actual purchase of Y
=
152,945 × 28.2
=
4,313,049
Quantity Purchased
Page 43 of 78
(b)
Skilled Labour:
Std. rate
=
150/hour
Actual Rate
=
165 (150 × 110%)
Std. hours required for A.P
=
50,000 × 1.5 = 75,000
Actual hours spent/worked
=
3/7 × 168,000 = 72,000
Total Skilled Labour Cost Variance:
Standard Labour Cost of Actual Production – Actual Labour Cost
(SHW for A.P × SR) – (AHW × A.R)
= (50,000 × 1.5 × 150) – (72,000 × 165)
= 630,000 A
Labour Rate Variance
(SR – AR) × AHW
(150 – 165) × 72,000
= 1,080,000 A
Labour Efficiency Variance
(SHW for Actual Production – AHW)
(50,000 × 1.5 – 72,000) × 150
= 450,000 F
Unskilled Labour:
Std. rate = 100/hours.
Actual rate = 105/hour (100 × 105%)
Std. hours required = 50,000 × 2 = 100,000
Actual hours = 4/7 × 168,000 = 96,000
Total Unskilled Labour Cost Variance:
Standard Labour Cost of Actual Production – Actual Labour Cost
(SHW for A.P × S.R) – (AHW × A.R)
= (50,000 × 2 × 100) – (96,000 × 105)
80,000 A
Labour Rate Variance
(SR – AR) × AHW
Labour Efficiency Variance
(SHW for Actual Production – AHW) x
SR
(50,000 × 2 – 96,000) × 100
= 400,000 F
(100 – 105) × 96,000
= 480,000 A
Total Variable OH Cost Variance:
Standard OH Cost of Actual Production – Actual Variable OH Cost
(SHW for A.P × S.R) – (AHW × A.R)
= [(50,000 × 1.5 × 100) + (50,000 × 2 × 80)] – 16,680,000
= 1,180,000 A
V-OH Spending Variance
(SR – AR) × AHW
V-OH Efficiency Variance
(SHW for AP - AHW) × S.R
Or
(SR × AHW) – (AR × AHW)
= 14,880,000* – 16,680,000
*[100 × 72,000 + 80 × 96,000]
= 1,800,000 A
(50,000 × 1.5 – 72,000) × 100 = 300,000 F
(50,000 × 2 – 96,000) × 80 =
320,000 F
620,000 F
Page 44 of 78
And fulfill the covenants. Indeed the covenants will be questioned (on the day of judgement). [17:34]
Fixed OHs total Variance:
Actual Fixed OH =
4,240,000
Actual Production × S.R (50,000 × 80*) = 4,000,000
240,000 A
*fixed overhead rate / unit = 4,000,000 / 50,000 = 80 / unit
**fixed overhead rate / hour = 4,000,000 / 175,000*** = 22.858 / hour
***[50,000 x (1.5 + 2)]
Fixed-OH Expenditure Variance
Fixed-OH Volume Variance
Actual Fixed OH (4,000,000 x 1.06) 4,240,000
Budgeted F OH
(50,000 × 80)
4,000,000
240,000 A
Budgeted F-OH (50,000 × 80) =
Actual Production × S.R
(50,000 × 80) =
4,000,000
4,000,000
-
The only F-OH Variance that can be calculated is expenditure variance. There should not be any volume
variance as budgeted production capacity is equal to actual production. However volume variance can
be sub-divided into F-OH Capacity and F-OH Efficiency Variances as follows:
F-OH Volume Variance
Capacity Variance
Budgeted capacity hrs. × S.R
50,000 × (1.5 + 2) × 22.858**
Actual hours × S.R
168,000 × 22.858 =
Efficiency Variance
Actual hours × S.R
168,000 × 22.858 =
Std. hours for A.P × S.R
50,000 × (1.5 + 2) × 22.858 =
4,000,000
3,840,000
160,000 A
3,840,000
4,000,000
160,000 F
[not required for additional information]
If factory overheads expenditure variance is to be calculated combined; then:
Actual F-OH (16,680,000 + 4,240,000) =
20,920,000
Less:
AHW × S.R (100 × 72,000) + (80 × 96,000) =
14,880,000
Budgeted Production × S.R (50,000 × 80) =
4,000,000
18,880,000
2,040,000 A
Total Factory Overheads Variance (not required just for additional information)
Actual (16,680,000 + 4,240,000)
20,920 =
Applied F-OH (50,000 × 390*)
19,500
1,420 A
Expenditure
Actual F-OH =
Less: Std. Cost of F-OH:
AHW × S.R
VOH Efficiency
20,920
Volume
(SHW for A.P – AHW) × S.R
(50,000×1.5 – 72,000)× 100 = 300,000F
(50,000×1.2 – 96,000)× 80 = 320,000F
620,000F
72,000×100 + 96,000×80 =
Budgeted Prod. 50,000×80
1,180 A
240 A
Budgeted F-OH 50,000×80 =
Actual prod×S.R 50,000×80 =
400,000
400,000
--
14,880
4,000
18,880
2,040 A
Calculation of rates:
*V-OH rate /unit = [100 × 1.5 + 80 × 2]
F-OH rate/unit = 4,000,000 ÷ 50,000
=
=
310
80
390
Page 45 of 78
A.11
Actual Material Cost:
[Std. Material Cost of A.P] – [Actual Material Cost]
(SQU × SR) – (AQU × AR)
(100,000 × 170) – 18,420,000 =
1,420,000 A
Usage = 820,000 A
Price = 600,000 A
Direct Labour Variances
Rate
(SR – AR) × AHW
Efficiency
(SHW for A.P – AHW) x SR
16,250,000 

120 −
 × 130,000
130,000 

(100,000 × 1.25 – 130,000) × 120
650,000 A
600,000 A
Variable overheads total variance:
[SHW for A.P × S.R] – (AHW × AR)
(100,000 × 1.25 × 90) – (13,000,000) =1,750,000 A
(SR – AR) × AHW
(SHW for A.P – AHW)
13,000,000 

 90 −
 × 130,000
130,000 

(100,000 × 1.25 – 130,000) × 90
1,300,000 A
450,000 A
Fixed-OH Total variance
 Actual = 2,500,000 

 Nil
 Applied = 2,500,000
(100,000 × 25)
Actual F-OH =
Budgeted F-OH (102,400 × 25)
2,500,000
2,560,000
60,000 F
102,400 × 25 =
100,000 × 25 =
2,560,000
2,500,000
60,000 A
60,000 A
Budgeted Capacity hrs × S.R
Actual Consumed hrs × S.R
128,000 × 20 =
130,000 × 20 =
2,560,000
2,600,000_
40,000 F
Actual Consumed hrs × S.R
Std. hours for actual prod x SR
130,000 × 20 =
100,000 × 1.25 × 20 =
2,600,000
2,500,000
100,000 A
(W-1) Fixed and Variable OH per Hours
Std. total OH rate / labour hour (137.5 ÷ 1.25)
Std. fixed OH rate / labour hour (2,560,000 ÷ 128,000)
Std. Variable OH rate / labour hour (balance)
Fixed OH Rate/Unit =
=
=
=
110/hr.
20/hr.
90/hr.
2,560,000
= 25
102,400 *
*Budgeted Production – 128,000 ÷ 1.25 = 102,400
Page 46 of 78
And never say of anything, “I shall do such and such thing tomorrow” except (with the saying) if ALLAH wills!”
A.12
All solution same except four variances:
Combined factory overheads Expenditure Variance (as break up of actual factory overheads is not
available):
Actual Production overheads
Less: Total Std. Cost of Factory overheads
[AHW × S.R]
= 130,000 × 90
Budgeted Production × S.R
= (102,400 × 25) =
Total Expenditure Variance
15,500,000
11,700,000
2,560,000
14,260,000
1,240,000 A
1,300,0000 A
60,000 F
Remaining variable overheads efficiency, fixed overheads capacity and efficiency variances as in Q.11
[not required for additional information]
Total OH Variance Combined (VOH + F-OH)
Actual Factory OH =
Applied Factory OH
(100,000 × 137.5)
Expenditure
As above 1,240 A
15,500,000
13,750,000
1,750,000 A
Efficiency
450 A (as previous)
(Under applied)
Volume
60 A (as previous)
Page 47 of 78
Extra practice questions:
Question 1
Jack and Jill (JJ) manufactures various products. The following information pertains to one of its main products:
(i)
Standard cost card per unit
Rupees
Direct material (5 kg at Rs. 40 per kg)
200
Direct labour (1.5 hours at Rs. 80 per hour)
120
Factory overheads
130% of direct labour
(ii)
Fixed overheads are budgeted at Rs. 3 million based on normal capacity of 75,000 direct labour hours
per month.
(iii)
Actual data for the month of June 2015
Units
Opening work in process (80% converted)
8,000
Started during the month
50,000
Transferred to finished goods
48,000
Closing work in process (60% converted)
7,000
Rupees
Material issued to production at: Rs. 38 per kg
1,900,000
Rs. 42 per kg
8,400,000
Direct labour at Rs. 84 per hour
6,048,000
Variable factory overheads
6,350,000
Fixed factory overheads
2,850,000
(iv)
Materials are added at the beginning of the process. Conversion costs are incurred evenly throughout the
process. Losses up to 3% of the units are considered as normal. However, losses are determined at the
time of inspection which takes place when units are 90% complete.
(v)
JJ uses FIFO method for inventory valuation.
Required:
(a)
Compute equivalent production units
(b)
Calculate the following variances for the month of June 2015:
(05)
•
Material rate and usage
(03)
•
Labour rate and efficiency
(03)
•
Variable factory overhead expenditure and efficiency
(04)
•
Fixed factory overhead expenditure and volume
(04)
Note: if inspection stage is given, then multiply the normal loss percentage with the inspected units to get the
normal loss units.
Page 48 of 78
I am Muslim, Islam is my Deen,ALLAH is my LIGHT, Quran is my LIFE. Sunnah is my GOAL, and Jannah is my DREAM.
A. 1
Jack & Jill:
Equivalent Units Using FIFO
Quantity
Schedule
Equivalent Production Units
Material
Opening Units (80% Conversion)
Units started
Conversion
8,000
50,000
58,000
Units transferred
48,000
8,000
--
1,600
40,000
40,000
40,000
Closing WIP (60% Conversion)
7,000
7,000
4,200 (60%)
Normal loss (58,000 – 7,000) ×
3%
1,530
--
--
Abnormal loss (90% Conversion)
1,470
1,470
1,323 (90%)
58,000
48,470
47,123
(b) Variances:
Material
Rate
(40 – 38) × 50,000* = 100,000 F
(40 – 42) × 200,000** = 400,000 A
*1,900,000 ÷ 38 = 50,000
**8,400,000 ÷ 42 = 200,000
Usage
(48,470 × 5 – 250,000) × 40 = 306,000 A
300,000 A
250,000 kgs
Labour
Rate
Efficiency
(80 – 84) × 72,000* = 288,000 A
(47,123 × 1.5 – 72,000) × 80 = 105,240 A
[6,048,000 ÷ 84]
Variable -OH
Expenditure
Efficiency
(64 – 6,350,000/72,000) × 72,000 = 1,742,000 A
(47,123 × 1.5 – 72,000) × 64 = 84,192 A
Fixed -OH
Expenditure
Volume
2,850,000
50,000 × 60 = 3,000,000
3,000,000
47,123 × 60 = 2,827,380
150,000 F
172,620 A
Page 49 of 78
(W-1) Std. FOH rate/hr & per Unit:
Std. F-OH rate/hr (120 × 130%) ÷ 1.5 =
104/ hr
&
156/unit
Std. Fixed F-OH rate / hr [3,000,000 ÷ 75,000] =
40 / hr
&
60/unit
&
96/unit
Std. Variable F-OH rate / hr (104 – 40)
64 / hr
Question 2
Sigma Limited (SL) is a manufacturer of product A. SL operates at a normal capacity of 90% against its available
annual capacity of 50,000 machine hours and uses absorption costing. The following summarised profit
statements were extracted from SL’s budget for the year ending 31 December 2015.
Actual – 2014
Units
Sales
Budget – 2015
Rs. In ‘000’
Rs. In ‘000’
Units
4,125
49,500
4,600
56,580
Opening inventory
400
(3,400)
600
(5,400)
Cost of production
4,325
(38,925)
4,500
(44,325)
600
5,400
500
4,925
Closing inventory
Under absorbed production overheads
Selling and administration cost (30% fixed)
Net profit
(100)
(3,000)
(5,250)
9,475
6,530
Other relevant information is as under:
2014
Standard machine hours per unit
Budget - 2015
10 hours
10 hours
Rs. 2,000
Rs. 2,250
Estimated fixed production overheads at normal capacity
Rs. 3,600,000
Rs. 4,050,000
Actual production overheads (Actual machine hours 44,000)
Rs. 8,750,000
-
Standard production overhead rate per unit
Required:
(a)
What do you understand by under / over absorbed production overheads?
(02)
(b)
Analyse the under absorbed production overheads of SL for the year ended 31 December 2014, into
spending (means expenditure) and volume variances. Give two probable reasons for each variance.
(06)
(c)
Prepare budgeted profit and Loss Statement for the year ending 31 December 2015, using marginal
costing.
(07)
(d)
Analyse the difference between budgeted profit determined under absorption and marginal costing, for
the year ending 31 December 2015.
(02)
Answer 2
(a)
Under / Over absorbed production Overheads:
Production overhead rate is predetermined at the beginning of the period based on budgeted annual
overheads and budgeted annual production. Overheads are applied to actual units using predetermined
overhead rate. However, actual overheads and actual production may differ from budgeted overheads
and production, therefore it would result in under / over absorption of production overheads.
(b)
Total production (factory) Overhead Variance:
Actual Factory OH
=
8,750,000
Applied Factory OH (4,320 × 2,000)
=
8,650,000
100,000 A
Page 50 of 78
Never think any request is too much for Allah; He says: “BE” and “IT IS”
Expenditure (Spending)
Efficiency
Actual Factory OHs = 8,750
Volume
(not required but can be calculated)
Budgeted F-OH (4500×800)
Less: Std. cost of F-OH:
(SHW for A.P – AHW) × SR
Applied F-OH (4,325 × 800)
VOH:
(4325 × 10 – 44,000) × 120
AHW × S.R (44,000 × 120)
5,280
3,600
3,460
140 A
(Not required but can be
further
sub-divided
as
follows)
90 A
F-OH:
Budgeted F-OH (4,500×800)
3,600
8,880
130 F
Capacity
Efficiency
45,000 × 80 = 3,600
44,000 × 80 =
3,520
44,000 × 80 = 3,520
4,325 × 10 × 80 =
3,460
80 A
60 A
In 2014
F-OH rate/unit = 2,000 ÷ 10 =
F-OH rate/hr = 3,600,000 ÷ 45,000 =
Variable OH rate/hr (200 – 80)
Fixed F-OH rate / unit = 80 × 10 =
Variable F-OH rate / unit = 120 × 10 =
200/hr.
80/hr.
120/hr.
800
1,200
2,000
In 2015
F-OH rate/unit = 2,250 ÷ 10 =
Fixed OH rate / hr = 4,050,000 ÷ 4,500 =
VOH rate/hr (225 – 90)
Fixed F-OH rate/unit = (90 × 10)
Variable F-OH rate/unit (135 × 10) =
225/hr.
90/hr.
135/hr.
900
1,350
2,280
(c)
Budgeted profit and loss statement (using marginal costing)
For the year ended 31-12-2015
Rs 000
Sales
56,580
Less: Variable Cost of Sales:
Opening Stock [(5,400 – (600 × 0.8))
4,920
+ Variable COGM [44,325 – (45,000 × 0.9)]
40,275
- Closing Stock [4,925 – (500 × 0.9)]
(4,475)
(40,720)
Gross Contribution
15,860
Variable selling & Admin (5,250 × 70%)
(3,675)
Net Contribution
12,185
Fixed Production OHs
(4,050)
Fixed selling and distribution OHs (5,250 × 30%)
(1,575)
Net Profit
6,560
Page 51 of 78
(d)
Reconciliation of Budgeted Profits:
Profit as per marginal costing
6,560
Opening stock as per M.C
4,920
Closing stock as per M.C
(4,475)
Opening stock as per A.C
(5,400
Closing stock as per A.C
4,925
Profit As Per Absorption Costing
6,530
(480)
450
Q. 3 MZ Limited (MZL) manufactures a single product X and uses standard marginal costing
system. The standard cost card of product X is as follows:
Raw material (13 kg @ Rs. 135 per kg)
Labour (14 hours @ Rs. 100 per hour)
Variable production overheads (Rs. 75 per labour hour)
Rupees
1,755
1,400
1,050
Following data is available in respect of operations for the month of February 2018:
1. 55,000 units were put into process. 1,500 units were lost in process which were considered
to be normal loss. Process losses occur at the end of the process.
2. 698,000 kg of material was purchased at Rs. 145 per kg. Material is added at the start of
the process and conversion costs are incurred evenly throughout the process.
3. 755,000 labour hours were worked during the month. However, due to certain labour
related issues, wages were paid at Rs. 115 per hour.
4. Fixed production overheads are budgeted at Rs. 40 million for the month of February 2018. Total
actual production overheads amounted to Rs. 95 million. Actual fixed production overheads
exceeded budgeted fixed overheads by Rs. 1.1 million.
5. Inventory balances were as under:
Raw material (kg)
Work in process (units)
Finished goods (units)
(a)
01 February 2018
15,000
5,000 (60% converted)
10,000
28 February 2018
17,000
6,000 (80% converted)
12,000
MZL uses FIFO method for valuing the inventories.
Required:
Compute material, labour and overhead variances.
(14)
Page 52 of 78
Do not lose hope, nor be sad [Quran 3:139]
A. 3 MZL Limited
Variances:
Material
Rate (Price)
Usage
(SR – AR) × AQU
(SQU – AQV) × S.R
(135 – 145) × 696,000
[(53,500 × 13) – 696,000] × 135
6,960,000 A
67,500 A
Labour
Rate
Efficiency
(SR – AR) × AHW
(SHW – AHW) × S.R
(100 – 115) × 755,000
[(54,300 × 14) – 755,000] × 100
11,325,000 A
520,000 F
Variable OH
Expenditure
Efficiency
(SR – AR) × AHW
(SHW – AHW) × S.R
53,900,000 * 

75 − 755,000  × 755,000


[(54,300 × 14) – 755,000] × 75
2,725,000 F
390,000 F
*Actual Production OH =
95,000,000
Actual Fixed OH [40,000,000 + 1,100,000]
41,100,000
Variable Production OH (Actual)
53,900,000
Page 53 of 78
Fixed OH
Expenditure
Budgeted Fixed OH
Actual Fixed OH
40,000,000
41,100,000
1,100,000 A
Workings:
(W-1)
b/d
Input
Process Account
5,000
F.G (Output)
55,000
52,500
N. Loss
1,500
c/d
6,000
--
Equivalent Units:
Output
c/d WIP
Material
Conversion
1,500
--
2,000 (40%)
47,500
47,500
47,500
6,000
4,800 (80%)
53,500
54,300
52,500
6,000
Material A/c in kgs
b/d
Purchased
15,000
Used
696,000
698,000
c/d
17,000
Page 54 of 78
Do not cry at your loss, ALLAH will not take anything from a believer without replacing it with something better.
Q. 4 (a)
Following information has been extracted from the records of Silver Industries Limited (SIL) for the
month of June 2017:
Production
Direct labour
Variable & fixed
Units
hours
Overheads (Rs.)
Available capacity
10,000
30,000
Budget
8,000
24,000
3,600,000
Actual
8,600
25,000
3,900,000
Fixed overheads were budgeted at Rs. 1,200,000. Applied fixed overheads exceeded actual fixed
overheads by Rs. 20,000.
SIL uses standard absorption costing. Over/under applied factory overheads are charged to profit
and loss account.
Required:
(i) Prepare accounting entries to record the factory overheads.
(03)
(ii) Analyse under/over applied overheads into expenditure, efficiency and capacity
variances.
(11)
(b) Comment on the difference between overhead variances under marginal and
absorption costing.
(03)
A. 4
a) (i) Entries
1) F – OH
2) WIP
3) P/L
3,900,000
Cash/Payable
3,900,000
3,870,000
F – OH
3,870,000
30,000
F – OH
30,000
Actual Fixed OH (balancing)
Applied Fixed OH (8,600 x 150*)
Over applied Fixed OH
*[1,200,000 ÷ 8,000 = 150/unit]
=
=
1,270,000
1,290,000
20,000
=
=
3,600,000
1,200,000
2,400,000
=
=
150/Unit
50/Hour
=
=
3,900,000
1,270,000
2,630,000
Actual Factory OH
=
3,900,000
Applied Factory OH (8,600 x *450)
=
3,870,000
Total Factory OH – Budgeted
Fixed OH – Budgeted
Variable Factory OH – Budgeted
Fixed OH Std. Rate/Unit
Fixed OH Std. Rate/Hour
Total Factory OH – Actual
Actual Fixed OH – Actual
Actual Variable Factory OH
(a)
1,200,000/8,000
1,200,000/24,000
Overall Under/Over Applied Factory OH:
30,000 A
*[ F-OH Std. Rate/Unit]
3,600,000/8,000 = 450/Unit
Page 55 of 78
Under Absorbed Factory-OH 30,000 A
(Not Required for Extra Information)
Fixed – OH Volume Variance
Budgeted Fixed OH = 1,200,000
(8,000 x 150)
Applied Fixed OH = 1,290,000
(8,600 x 150)
90,000 F
V-OH Efficiency Variance
(SHW – AHW) x SR
(8,600 x 3 – 25,000) x 100
80,000 F
Factory-OH Expenditure
Variance
Actual Factory-OH 3,900,000
Std. cost of Factory-OH:
From fixed OH:
Budgeted Fixed OH1,200,000
From V – OH:
AHW x SR*(W-1) 2,500,000
(25,000 x 100)* 3,700,000
200,000 A
Fixed OH Capacity Variance
Budgeted capacity hrs x S.R = 1,200,000
(24,000 x 50)
Actual Consumed hrs x S.R = 1,250,000
(25,000 x 50)
50,000 F
Fixed OH Efficiency Variance
Actual Cons. hrs x S.R = 1,250,000
(25,000 x 50)
Std. hrs for A.P x S.R
= 1,290,000
(8,600 x 3* x 50)
40,000 F
*[24,000 hrs/8,000 hrs]
If Factory OH expenditure variance is calculated separately:
Variable OH Expenditure Variance
Fixed OH Expenditure Variance
[S.R – A.R] x AHW
Actual Fixed OH
1,270,000
Budgeted Fixed OH
1,200,000
(100 –
2,630,000
25,000
130,000 A
) x 25,000
70,000 A
W-1)
V – OH rate/hr
[300 ÷ 3] = 100/hr
W-2)
F – OH rate/unit = 450
Fixed OH rate/unit = 150
V – OH rate/unit
300
(b) Comments on the difference between overhead variances under marginal and
absorption costing:
In absorption costing, fixed overheads are allocated to the products and these are included in
the inventory valuations as product cost (means applied to production).
In marginal costing, only variable overheads are assigned to the product; fixed overheads are
regarded as period costs and recognized as an expense in the period in which they are
incurred.
Variable and fixed overhead variances under marginal and absorption costing are same, except
for the Fixed overhead volume variance and therefore Fixed overhead capacity and Fixed
overhead efficiency variance are calculated only under absorption costing. In addition Fixed
overhead total variance is only calculated under Absorption costing.
Page 56 of 78
Loneliness is better than a bad company.
Q. 5 Seema Enterprises (SE) produces various leather goods. It operates a standard marginal
costing system. For one of its products Bela, following information was extracted for the month of
December 2015 from SE's budget document for the year 2015.
Sales
Cost of production of 10,000 units:
Direct material
Direct labour
Variable overheads
Fixed overheads
9,800 units
5,000 kg
24,000 hrs
2,000 machine hrs
Rs. in million
25.00
9.00
3.60
4.40
3.80
Actual production for the month of December 2015 was 12,000 units whereas SE earned
revenue of Rs. 30 million by selling 11,000 units of Bela. Following information pertains to
actual cost of production for the month:
(b) 5,700 kg material was issued to production. Raw materials are valued using FIFO
method. Other details relating to the raw material used for Bela are as follows:
1-Dec-2015 Opening balance
10-Dec-2015 Purchases
(ii)
kg
3,000
15,000
Rs. in million
5.70
26.25
To minimise labour turnover, SE increased production wages by 10% above the
standard rate, effective 1 December 2015. This improved labour efficiency by 5% as
compared to budget.
(iii) 2,100 machine hours were worked. Details of overheads are as
under:
• Depreciation amounted to Rs. 1.6 million (same as budgeted)
• Factory building rent amounted to Rs. 1.20 million (same as budgeted)
• All other overheads were 4% in excess of the budget
(iv) There was no opening finished goods inventory of Bela. Actual closing inventory
may be valued at standard marginal production costs.
Required:
a) Compute budgeted and actual profit of Bela for the month of December 2015 using marginal
costing.
(6)
b) Reconcile the budgeted profit with actual profit using relevant variances under marginal
costing.
(14)
Page 57 of 78
A. 5
Seema Enterprises
(a) Budgeted and actual profits for the month of December 2015
(Using marginal costing)
Rs. in million
(i)
Budgeted profit:
Sales (9,800 units)
Variable cost of sale:
Opening Finished goods
+ Variable COGM (10,000 units):
Direct Material
9
Direct Labor
3.6
Variable OH`s
4.4 17
Closing finished goods inventory at standard cost
(0.34)
[17M ÷ 10,000×200[10,000 - 9,800]]
Gross Contribution
Fixed cost
Net profit
Actual profit:
Sales (11,000 units)
Variable Cost of Sale:
Opening Finished Goods
+ variable COGM:
Direct Material Consumed:
Opening stock [3000 Kg]
5.7
+Purchases
[15,000 Kg]
26.25
Closing cost [12,300* Kg x 1750**] 21.525
25.00
(16.66)
8.34
(3.80)
4.54
30.00
10.425
*[3,000+15,000-5,700]
**[26.25M/15,000]
4.51
OR : [3,000 kgs
5.7M + 26.25M/15,000 x 2700 kgs]
=10.425
Direct labor [27,360*x165*]
4.80
*Actual labor hr`s
[24,000/10,000] = 2.4x12,000x95% =27,360
**Actual labor rate
[3,600,000/24,000 =150x1.1=165
Variable OH [2,100x2,288*]
4.80
*Actual variable OH rate/hr
19.74
[ 4,400,000/2,000] =2,200x1.04=2,288/machine hr.
Less: Closing finished goods inventory (at standard cost) [17M÷10,000×1,000](1.70)
Gross Contribution
Fixed cost [1.6+1.2+(3.8-1.6-1.2)1.04]
Actual Profit
(18.04)
11.96
(3.84)
8.12
Page 58 of 78
Death may not come to us today, but we are one day closer to it.
(ii)
Budgeted profit
Budgeted fixed cost
Budgeted contribution
Variances: (Workings below)
Sales price
Sales volume
Material price
Material usage
Labor rate
Labor efficiency
Variable overhead expenditure
Variable overhead efficiency
Actual Contribution:
Budgeted fixed cost
Fixed OH Expenditure Variance
Actual Profit
4.54
3.80
8.34
1.94F
1.02F
0.17A
0.54F
0.41A
0.22F
0.18A
0.66F
11.96
3.8
0.04A
(3.84)
8.12
Working:
Calculation of Variances:
Sales
Price
Volume
(BR – AR) × AQS
(BQS – AQS) × Std.cont/unit
(25M/9,800 – 30M/11,000) × 11,000
[(9,800 - 11,000) x 8.34M/9,800
1.94 F
1.02 F
Material
Price
Usage
(SR – AR) × AQU
(SQU – AQU) × S.R
[(12,000x0.5*)-5,700]x1,800
[1,800–1,900(5.7M/3,000)]× 3,000=0.3A
[1,800-1,750(26.25M/15,000)]x2,700=0.135 A
0.17A
0.54 F
*5,000 kgs /10,000 units
Labour
Rate
Efficiency
(SR – AR) × AHW
(SHW – AHW) × S.R
(150 – 165) × 27,360
[(12,000 × 2.4) – 27,360] × 150
0.41 A
0.22 F
Page 59 of 78
Variable OH[On The Basis Of Machine Hrs As In Question]
Expenditure
Efficiency
(SR – AR) × AHW
(SHW – AHW) × S.R
[2,200-2,288]x2,100
[(12,000 × 0.2*) – 2,100] × 2,200
*[2,000/10,000]
0.18 A
0.66 F
Fixed OH
Expenditure
Budgeted Fixed OH
Actual Fixed OH
3.8
3.84
0.04 A
Question 6
Zamil Industries (ZI) produces and markets an industrial product Zeta. ZI uses standard absorption costing
system. The break-up of Zeta’s standard cost per unit is as under:
Rupees
Materials:
Axe – 1 kg
160
Zee – 2 kg
210
Direct labour – 0.8 hours
200
Overheads –
180
0.8 hours
Production of Zeta for the month of August 2016 was budgeted at 15,000 units. Information pertaining to
production of Zeta for August 2016 is as under:
(i)
Raw material inventory is valued at lower of cost and net realizable value. Cost is determined under
FIFO method. Stock cards of materials Axe and Zee are reproduced below:
Axe
Date
Description
1-Aug
Opening balance
3-Aug
Purchase returns
4-Aug
Purchase
6-Aug
Issues to production
Zee
Kg
Cost per kg
(Rs.)
Kg
Cost per kg
(Rs.)
9,000
150
4,000
120
-
-
8,000
122
-
-
(2,000)
122
17,000
148
35,000
125
(16,000)
-
(29,000)
-
(ii)
Actual direct wages for the month were Rs. 3,298,400 consisting of 11,780 direct labour hours.
(iii)
Fixed overheads were estimated at Rs. 540,000 based on budgeted direct labour hours.
(iv)
The actual fixed overheads for the month were 583,000.
Actual sales of Zeta for the month of August 2016 was 12,000 units. Opening and closing finished goods
inventory of Zeta was 5,000 and 8,500 units respectively.
Required:
(a)
(b)
Compute following variances:
(i)
Material price, mix and yield variances
(07)
(ii)
Labour rate and efficiency variances
(04)
Compute applied fixed overheads and analyse ‘under/over applied fixed factory overheads’ into
expenditure, efficiency and capacity variances.
(08)
Page 60 of 78
Beauty lies in beautiful behavior, manners and mind.
Answer 6
(a)
(i) Material Variances:
1:
Material Price Variance [Axe] [FIFO]
[SR – AR] × AQU
(i)
[160 – 150] × 9,000 =
90,000 F
(ii)
[160 – 148] × 7,000 =
84,000 F
16,000 kgs 174,000 F
Zee:
[SR – AR] × AQU
(i)
[105* - 120] × 4,000 =
60,000 A
[105 – 122] × 6,000 =
102,000 A
[105 – 125] × 19,000 =
380,000 A
29,000 kgs
542,000 A
* [210 ÷ 2]
2.
Material Mix and Yield Variance
Working of Actual Production:
Finished Goods Account
b/d
5,000
Produced
Sold
12,000
15,500
c/d
SQU in SM for AP
15,500
(15,500 × 1)
31,000
(15,500 × 2)
46,500
Axe
Zee
8,500
AQU in SM for AP
15,000
(45,000 × 1/3)
30,000
(45,000 × 2/3)
45,000
Yield Variance.
AQU in AM for AP
16,000
29,000
45,000
Mix Variance
Yield Variance:
Axe
(15,500 – 15,000) × 160 =
80,000 F
Zee
(31,000 – 30,000) × 105 =
105,000 F
185,000 F
Mix Variance:
Axe
(15,500 – 16,000) × 160 =
160,000 A
Zee
(30,000 – 29,000) × 105 =
105,000 F
55,000 A
Page 61 of 78
(ii)
(b)
Labour Variances
[SR – AR] × AHW
[SHW – AHW] × S.R
3,298,400 

250 − 11,780  × 11,780


[(15,500 × 0.8) – 11,780] × 250
353,400 A
155,000 F
Analyses of Under / Over applied Fixed OH
Actual Fixed Overheads =
583,000
Applied Fixed Overheads [15,500 × 36*] =
558,000
Under Applied Fixed overheads
25,000 A
*Standard Fixed OH rate per hour [540,000 ÷ 15,000 × 0.8] = 45
Standard Fixed OH rate per Unit [45 × 0.8] = 36
Fixed Overheads Expenditure
Variance
Actual Fixed OH =
583,000
Budgeted Fixed OH
540,000
43,000 A
Fixed OH Capacity Variance
Budgeted Capacity hrs × S.R = 540,000
[12,000 (15,000 x 0.8) x 45]
Actual consumed hrs × S.R =
530,100
[11,780 × 45]
9,900 A
Fixed OH Volume Variance
(Given)
(Given)
Budgeted F-OH (15,000×36)
Applied F-OH (15,500×36)
540,000
558,000
18,000 F
Fixed OH Efficiency Variance
Actual Consumed hrs × SR =
530,100
[11,780 × 45]
Std. hrs for A.P × S.R
558,000
[12,400 (15,500 x 0.8) x 45]
27,900 F
Page 62 of 78
Allah has heard the yearning of your quiet heart. Be patient, everything will be ok soon.
Q.1: (for test)
H Ltd. manufacture a standard leather walking boot, for which the standard unit cost and selling price are
as follows:
Rs.
Direct material
Leather
3 units at Rs. 5 per unit
15
Other materials
3
18
Direct labour
1 ½ hours at Rs. 4 per hour
6
Variable production overheads
1 ½ hours at Rs. 2 per hour
3
Fixed production overheads
1 ½ hours at Rs. 6 per hour
9
Standard cost
36
Selling price
48
Standard profit, before marketing and administrative expenses
12
Budgeted production and sales for 20X8 were 3,000 units.
During the period the actual results were as follows:
Production
Sales
Sales revenue
Leather purchased:
Units
3,200
2,850
Rs.
Hours
141,000
Quantity
Cost
Leather used
Other materials purchased and used
Direct labour:
Hours paid for
Production time
Labour cost
Variable production overheads
Fixed production overheads
9,200
45,400
9,750
9,500
5,850
5,100
24,100
10,650
31,500
Stocks of leather are valued at standard cost, and stocks of finished goods are valued at standard full
production cost.
Required:
Prepare an operating statement for the period reconciling budgeted and actual profit and specifying all the
relevant variances. Ignore marketing and administration costs.
A.1
Operating Statement:
Budgeted Profit (3,000 × 12)
Sales Price Variance
Sales Volume Variance
36,000
4,200 F
1,800 A
38,400
Cost Variances:
Leather Price
Leather Usage
Other Material
Direct Labour – Rate
– Efficiency
– Idle Time
Variable OH: Expenditure
Efficiency
600 F
750 A
100 F
700 A
1,200 A
3,000 A
450 A
600 A
Page 63 of 78
Fixed OH:
Expenditure
Volume
4,500 A
1,800 F
*Actual Profit
29,700
*Calculation of Actual Profit:
Sales
Less: Cost of Sales:
Leather Consumed:
Opening Stock (550 × 5)
Add: Purchases
Less: Closing Stock
Other Materials
Labour
V-OH
F-OH
Cost of Goods Manufactured
Opening F.G
Closing F.G (350 × 36)
Cost of Sales
Gross Profit
141,000
2,750
45,400
(--)
48,150
9,500
24,100
10,650
37,500
123,900
-(12,600)
(111,300)
29,700
Calculation of Variances:
(a)
Leather:
Price
Usage
45,400 

5 − 4,200  × 9,200


[(3,200 × 3) – 9,750) × 5]
600 F
750 A
Stocks are valued at std. costs and so price variance must be calculated on quantity purchased
rather than quantity used.
(b)
Other Material:
We are not given a breakdown into units of material and price per unit of other material and so the
only material variance we can calculate is the total cost variance.
(SQU for A.P × S.R)
–
Actual Cost
3,200 × 3
–
9,500
=
100 F
9,600
(c)
Labour Variances:
Rate
Idle time Variance
24,100 

4 − 5,850  × 5,850


Idle time × S.R [5,850 – 5,100] × 4
700 A
3,000 A
Efficiency Variance
[(3,200 × 1.5) – 5,100) × 4]
1,200 A
(The efficiency variance is
based on productive hours,
excluding idle time)
Page 64 of 78
‫اے ایمان والوں نماز اور صبر سے مدد تالش کرو۔بے شک ہللا صبر کرنے والوں کے ساتھ ہے ۔‬
(d)
Variable Overhead Variances:
Expenditure
Efficiency Variance
10,650 

2 − 5,100  × 5,100


[(3,200 × 1.5) – 5,100) × 2]
450 A
(e)
600 A
Fixed Overhead Variances:
Expenditure
Actual Fixed OH =
31,500
Budgeted Fixed OH (3,000 × 9) 27,000
4,500 A
Volume
Budgeted Fixed OH (3,000 × 9) 27,000
Actual production × S.R (3,200×9) 28,800
1,800 F
Break-up of Fixed OH Volume Variance (not required only for additional information)
Budgeted capacity hrs. × S.R
3,000 × 1.5 × 6 =
Actual Consumed hrs. × S.R
5,100 × 6
(f)
27,000
27,000
3,600 F
Actual Consumed hrs. × S.R
5,100 × 6
Std. hrs. for A.P × S.R
3,200 × 1.5 × 6
30,600
28,800
1,800 A
Sale Variances:
Sale Price Variance
141,000 

48 − 2,850  × 2,850


4,200 F
Sale Profit Volume Variance
[3,000 – 2,850] × 12
1,800 A
Page 65 of 78
Variance Analysis
1.LETTUCE
Lettuce makes a product – the vegetable guard. It is the organic alternative to slug pellets and chemical
sprays.
For the forthcoming period budgeted fixed costs were Rs.6,000 and budgeted
production and sales were 1,300 units.
The vegetable guard has the following standard cost:
Selling price
Rs.
50
Materials 5kg  Rs.4/kg
20
Labour 3hrs  Rs.4/hr
12
9
Variable overheads 3hrs  Rs.3/hr
Actual results for the period were as follows:
1,100 units were made and sold, earning revenue of Rs.57,200.
6,600kg of materials were bought at a cost of Rs.29,700 but only 6,300 kg were used
3,600 hours of labour were paid for at a cost of Rs.14,220. The total cost for variable
overheads was Rs.11,700 and fixed costs were Rs.4,000.
The company uses marginal costing and values all inventory at standard cost.
Required:
(a)
(b)
(c)
Produce a statement reconciling actual and budgeted profit using appropriate
variances.
(15)
Assuming now that the company uses absorption costing, recalculate the fixed
production overhead variances
(6)
Discuss possible causes for the labour variances you have calculated.
(4)
1. MOONGAZER
MoonGazer produces a product – the telescope. Actual results for the period were:
❑
430 units made and sold, earning revenue of Rs.47,300.
❑
Materials: 1,075 kg were used.
❑
1,200 kg of materials were purchased at a cost of Rs.17,700
❑
Direct labour: 1,700 hours were worked at a cost of Rs.14,637
❑
Fixed production overheads expenditure: Rs.2,400.
❑
Variable production overheads expenditure: Rs.3,870. The
standard cost card for the product is as follows:
Direct material
Direct labour
Variable overhead
Fixed production overhead per unit
2 kg  Rs.15
4hrs  Rs.8.50
4hrs  Rs.2.00
Rs.
30
34
8
5
77
The standard unit selling price is Rs.100. The cost card is based on production and
sales of 450 units in each period.
Page 66 of 78
TAWAKKUL is having full faith that ALLAH will take care of you even when things look impossible.
The company values its inventories at standard cost.
Required
Produce an operating statement to reconcile budgeted and actual gross profit. (14)
2. CARAT
Carat plc, a premium food manufacturer, is reviewing operations for a three-month
period. The company operates a standard marginal costing system and manufactures
one product, ZP, for which the following standard revenue and cost data per unit of
product is available:
Selling price
Rs. 12.00
Direct material
A 2.5 kg at Rs. 1.70 per kg
Direct material
B 1.5 kg at Rs. 1.20 per kg
Direct labour
0.45 hrs at Rs. 6.00 per
hour
Fixed production overheads for the three-month period were expected to be Rs.
62,500.
Actual data for the three-month period was as follows:
Sales and production
48,000 units of ZP were produced and sold for Rs.
580,800
Direct material A
121,951 kg were used at a cost of Rs. 200,000
Direct material B
67,200 kg were used at a cost of Rs. 84,000
Direct labour
Employees worked for 18,900 hours, but 19,200
hours were paid at a cost of Rs. 117,120
Fixed production overheads
Rs. 64,000
Budgeted sales for the three-month period were 50,000 units of Product ZP.
Required
(a)Calculate the following variances:
(i)
sales volume contribution and sales price variances;
(ii) price, mix and yield variances for each material;
(iii) labour rate, labour efficiency and idle time variances.
(15)
(b) Prepare an operating statement that reconciles budgeted profit to actual profit with each
variance clearly shown.
(5)
c) Explain the reasons of variances.
Page 67 of 78
5. EXCELLENT LIMITED
Excellent Limited makes and sells a single product. The standard cost card for the product,
based on normal capacity of 45,000 units per month is as under:
Rupees
Material 60 kgs at Rs. 0.60 per kg
36.00
Labour ½ hour at Rs. 50.00 per hour
25.00
Variable factory overheads, 30% of direct labour cost
7.50
Fixed factory overheads
6.50
75.00
Total
Actual data for the month of August 20X3 is as under:
Work in process on August 1, 20X3 (60% converted)
Started during the month
Transferred to finished goods
Work in process on August 31, 20X3 (50% converted)
Material purchased at Rs. 0.50 per kg
Material issued to production
Direct labour at Rs. 52 per hour
Factory overheads (including fixed costs of Rs. 290,000)
Units
Units
Units
Units
Rs.
Kgs
Rs.
Rs.
10,000
50,000
48,000
10,000
1,750,000
3,100,000
1,300,000
600,000
The company uses FIFO method for inventory valuation.
All materials are added at the beginning of the process. Conversion costs are incurred
evenly throughout the process. Inspection takes place when the units
are 80%
complete. Under normal conditions, no spoilage should occur.
Required
•
Prepare a quantity and equivalent production schedules for material and
conversion costs.
•
Calculate material, labour and variable overhead variances. (Assume that the
material price variance is calculated as materials are used rather than as they are
purchased).
•
Calculate the over(under) absorption of fixed production overhead and
analyse it into expenditure variance and volume variance.
•
Analyse the fixed production overhead volume variance into efficiency and capacity
variances.
(20)
6. ABC LIMITED
ABC Limited produces and markets a single product. The company operates a standard costing
system. The standard cost card for the product is as under:
Sale price
Rs. 600 per unit
Direct material
2.5 kg per unit at Rs. 50 per kg
Direct labour
2.0 hours per unit at Rs. 100 per hour
Variable overheads
Rs. 25 per direct labour hour
Fixed overheads
Rs. 10 per unit
Budgeted production
500,000 units per month
The company maintains finished goods inventory at 25,000 units throughout the year.
Actual results for the month of August 20X3 were as under:
Page 68 of 78
My Lord enable me to be grateful for your favour which you have bestowed upon me and upon my parents,
and to work righteousness of which you approve and make righteous for me my offspring. Truely, I have
turned to you in repentance and truly, I am one of the Muslims [46:15]
Rupees in ‘000
Sales
480,000 units
295,000
Direct material
950,000 kgs
55,000
Direct labour
990,000 hours
105,000
Variable overheads
26,000
Fixed overheads
5,100
Required: Reconcile budgeted profit with actual profit using relevant variances. (18)
7. STANDARD COST SHEET
The following data relates to actual output, actual costs and variances for the four- weekly
accounting period number 4 of a company which makes only one product.
The value of work-in-progress at the end of period 4 was the same as the value of work-inprogress at the beginning of the month.
Actual production of Product XY
Actual costs incurred:
Direct materials purchased and used (150,000 kg)
Direct labour costs (32,000 hours)
Variable production overhead
Variances:
Direct materials price
Direct materials usage
Direct labour rate
Direct labour efficiency
Variable production overhead expenditure
Variable production overhead efficiency
18,000 units
Rs.000
210
136
38
Rs.000
15
9
8
16
6
4
Favourable
Adverse
Adverse
Favourable
Adverse
Favourable
Variable production overhead varies with labour hours worked. A
standard marginal costing system is operated.
Required
Present a standard product cost sheet for one unit of Product XY, showing how the standard
marginal production cost of the product is made up.
Page 69 of 78
VARIANCE ANALYSIS (Reasons)
Direct materials: possible causes of variances
When variances occur and they appear to be significant, management should investigate the reason for
the variance. If the cause of the variance is something within the control of management, control action
should be taken. Some of the possible causes of materials variances are listed below.
Materials price variance: causes
Possible causes of favorable materials price variances include:
• Different suppliers were used and these charged a lower price (favorable price variance) than the usual
supplier.
• Materials were purchased in sufficient quantities to obtain a bulk purchase discount (a quantity discount),
resulting in a favorable price variance.
• Materials were bought that were of lower quality than standard and so cheaper than expected.
Possible causes of adverse materials price variances include:
•
•
•
•
Different suppliers were used and these charged a higher price (adverse price variance) than the usual
supplier.
Suppliers increased their prices by more than expected. (Higher prices might be caused by an unexpected
increase in the rate of inflation.)
There was a severe shortage of the materials, so that prices in the market were much higher than expected.
Materials were bought that were better quality than standard and more expensive than expected.
Materials usage variance: causes
Possible causes of favorable materials usage variances include:
• Wastage rates were lower than expected.
• Improvements in production methods resulted in more efficient usage of materials (favorable usage
variance).
• Materials were of higher quality.
Possible causes of adverse materials usage variances include:
• Wastage rates were higher than expected.
• Poor materials handling resulted in a large amount of breakages (adverse usage variance). Breakages mean
that a quantity of materials input to the production process are wasted.
• Materials used were of cheaper quality than standard, with the result that more materials had to be thrown
away as waste.
Direct labor: possible causes of variances
When labor variances appear significant, management should investigate the reason why they occurred,
and take control measures where appropriate to improve the situation in the future. Possible causes of
labor variances include the following.
Possible causes of favorable labor rate variances include:
• Using direct labor employees who were relatively inexperienced and new to the job (favorable rate variance,
because these employees would be paid less than ‘normal’).
• Actual pay increase turning out to be less than expected.
Possible causes of adverse labor rate variances include:
•
•
•
An increase in pay for employees.
Working overtime hours paid at a premium above the basic rate (because overtime rate is more than normal
rate)
Using direct labor employees who were more skilled and experienced than the ‘normal’ and who are paid
more than the standard rate per hour (adverse rate variance).
Possible causes of favorable labor efficiency variances include:
• More efficient methods of working.
• Good morale amongst the workforce and good management with the result that the work force is more
productive.
• If incentive schemes are introduced to the workforce, this may encourage employees to work more quickly
and therefore give rise to a favorable efficiency variance.
• Previously unaccounted for learning and experience curves (will be discussed in next chapters as well)
Page 70 of 78
Every religion has a special character and the characteristic of Islam is modesty.
•
Using employees who are more experienced than ‘standard’, resulting in favorable efficiency variances as
they are able to complete their work more quickly than less-experienced colleagues.
Possible causes of adverse labor efficiency variances include:
• Using employees who are less experienced than ‘standard’, resulting in adverse efficiency variances.
• An event causing poor morale.(e.g management is not honoring its commitment of bonus)
Variable production overhead: possible causes of variances
Possible causes of favorable variable production overhead expenditure variances include:
• Forecast increase in costs not materializing
Possible causes of adverse variable production overhead variances include:
• Unexpected increases in energy prices
Anything that causes labor efficiency variance will have an impact on variable production overhead
efficiency variances as variable production overhead is incurred as the labor force carries out
production.(same as labor efficiency variances)
Possible causes of favorable variable production overhead efficiency variances include:
• More efficient methods of working.
• Good morale amongst the workforce and good management with the result that the work force is more
productive.
• If incentive schemes are introduced to the workforce, this may encourage employees to work more quickly
and therefore give rise to a favorable efficiency variance.
• Using employees who are more experienced than ‘standard’, resulting in favorable efficiency variances as
they are able to complete their work more quickly than less-experienced colleagues.
Possible causes of adverse variable production overhead efficiency variances include:
• Using employees who are less experienced than ‘standard’, resulting in adverse efficiency variances.
• An event causing poor morale.
FIXED PRODUCTION OVERHEAD COST VARIANCES: ABSORPTION COSTING
Fixed overhead expenditure variances can be calculated, for control reporting, for other overheads as
well as production overheads. For example:
• an administration fixed overheads expenditure variance is the difference between budgeted and actual fixed
administration overhead costs
• a sales and distribution fixed overhead expenditure variance is the difference between budgeted and actual
fixed sales and distribution overhead costs
The reasons for a favorable or an adverse volume variance might therefore be any of the
following.
• Working more hours than budgeted might be caused by working overtime, or taking on additional direct
labor employees.
• Working fewer hours than budgeted might be caused by staff shortages (due to employees leaving or absence
from work), hold-ups in production or lack of customer orders.
Fixed production overheads: possible causes of variances
Fixed overhead expenditure variance
•
•
•
Poor budgeting for overhead spending. If the budget for overhead expenditure is unrealistic, there will be an
expenditure variance due to poor planning rather than poor expenditure control.
Poor control over overhead spending (adverse variance) or good control over spending (favorable variance).
Unplanned increases or decreases in items of expenditure for fixed production overheads, for example, an
unexpected increase in factory rent.
Fixed overhead volume variance (discussion of its breakup)
A fixed overhead volume variance can be explained by anything that made actual output volume different
from the budgeted volume. The reasons could be:
• Efficient working by direct labor: a favorable labor efficiency variance results in a favorable fixed overhead
efficiency variance.
• Working more hours or less hours than budgeted (capacity variance).
Page 71 of 78
•
•
•
An unexpected increase or decrease in demand for a product, with the result that shorter/longer hours were
worked (adverse/favorable capacity variance)
Strike action by the workforce, resulting in a fall in output and therefore actual hours worked below
budgeted hours (adverse capacity variance).
Extensive breakdowns in machinery, resulting in lost production and therefore actual hours worked below
budgeted hours (adverse capacity variance).
INTERRELATIONSHIPS BETWEEN VARIANCES
The nature of interrelationships between variances
Some causes of individual variances have already been listed.
The reasons for variances might also be connected, and two or more variances might arise from the same
cause. This is known as an interrelationship between two variances.
For example, one variance might be favorable and another variance might be adverse. Taking each
variance separately, the favorable variance might suggest good performance and the adverse variance
might suggest bad performance. However, the two variances might be inter-related, and the favorable
variance and the adverse variance might have the same cause. When this happens, management should
look at the two variances together, in order to assess their significance and decide whether control action
is needed.
Interrelationships between variances are given below.
Materials price and usage
A materials price variance and usage variance might be inter-related. For example, if a company decides
to use a material for production that is more expensive than the normal or standard material, but easier to
use and better in quality, there will be an adverse price variance. However, a consequence of using better
materials might be lower wastage. If there is less wastage, there will be a favorable material usage
variance. Therefore, using a different quality of material can result in an adverse price variance and a
favorable usage variance.
Labor rate and efficiency
If there is a change in the grade of workers used to do some work, both the rate and efficiency variances
may be affected.
For example, if a lower grade of labor is used instead of the normal higher grade:
• there should be a favorable rate variance because the workers will be paid less than the standard rate
• however, the lower grade of labor may work less efficiently and take longer to produce goods than the
normal higher grade of labor would usually take. If the lower grade of labor takes longer, then this will
give rise to an adverse efficiency variance.
Therefore, the change in the grade of labor used results in two ‘opposite’ variances, an adverse efficiency
variance and a favorable rate variance.
When inexperienced employees are used, they might also waste more materials than more experienced
employees would, due to mistakes that they make in their work. The result might be not only adverse
labor efficiency, but also adverse materials usage.
Labor rate and variable overhead efficiency
When a production process operates at a different level of efficiency the true cost of that difference is the
sum of any costs associated with labor hours. Therefore, the issues described above also affect the
variable overhead efficiency variance.(means if lower grade of labor is used than rate variance will be
favourable but labor efficiency as well as variable overhead efficiency variance will be adverse because
of increase in hours)
Fixed overheads Capacity and efficiency
If a production process operates at a higher level of efficiency that might mean that it does not have to
operate for as long to produce the budgeted production volume. The favorable fixed production overhead
efficiency variance would cause an adverse fixed production overhead capacity variance.(if employees
works efficiently then budgeted production will be achieved in less actual hours resulting into adverse
capacity variance and vice versa)
The reverse is also true. If a production process operates at a lower level of efficiency that might mean
that it has to operate for longer than was budgeted. The adverse efficiency fixed production overhead
variance would cause a favorable fixed production overhead capacity variance.
Page 72 of 78
All praises and thanks be to ALLAH, who has guided us to this (i.e. Jannah), and never could we have found
guidance, were it not that ALLAH has guided us [7:43] [a prayer of people of Jannah]
The importance of reliable standard costs
It is important to remember that the value of variances as control information for management depends on the
reliability and accuracy of the standard costs. If the standard costs are inaccurate, comparisons between actual
cost and standard cost will have no meaning. Adverse or favorable variances might be caused by inaccurate
standard costs rather than by inefficient or efficient working.
MATERIALS MIX AND YIELD VARIANCES
Substitutable materials
If the materials are substitutable (i.e. less of one type of material can be compensated for by more of
another) the direct materials usage variance can be analyzed into:
• a materials mix variance; and
• a materials yield variance
The total of these two variances is the total material usage variance.
It is vital to understand that this further analysis should only be performed if the materials can be
substituted for each other. Mix and yield variances have a useful meaning only when the proportions (or
‘mix’) of the different raw materials in the final product can be varied and so are subject to management
control.
Factors to consider when changing the mix
Analysis of the material usage variance into the mix and yield components is worthwhile if management
have control of the proportion of each material used. Management will seek to find the optimum mix (it
is a mix which result into maximum cost saving and therefore profit) for the product and ensure that the
process operates as near to this optimum as possible.
Identification of the optimum mix involves consideration of several factors:(means management should
consider the following factors while deciding the optimum production mix)
• Cost. The cheapest mix may not be the most cost effective. Often a favorable mix variance is offset by an
adverse yield variance and the total cost per unit may increase.
• Quality. Using a cheaper mix may result in a lower quality product and the customer may not be prepared to
pay the same price. A cheaper product may also result in higher sales returns and loss of repute of business.
• The fall in quality would make the company vulnerable to reputational risk.
USING AND DERIVING STANDARD COSTS
Standard costing
Standard costing involves the establishment of predetermined estimates of the costs of products or
services, the collection of actual costs and the comparison of the actual results with the predetermined
estimates. The predetermined costs are known as standard costs and the difference between standard
and actual is known as variance.
• Standard cost is an estimated or predetermined cost of performing an operation or producing a good
or service, under normal conditions.
• Standard costing is a control technique that reports variances by comparing actual costs to pre-set
standards so facilitating action through management by exception.
Standard costing may be used with either a system of absorption costing or a system of marginal
costing. In simple words…
Standard costing involves using an expected cost (standard cost) as a substitute for actual cost in the
accounting system. Periodically the standard costs are compared to the actual costs. Differences
between the standard and actual are recorded as variances in the costing system.
When is standard costing appropriate?
Standard costing can be used in a variety of situations.
• It is most useful when accounting for homogenous goods produced in large numbers, when there is a
degree of repetition in the production process.
• A standard costing system may be used when an entity produces standard units of product or service
that are identical to all other similar units produced.
• Standard costing is usually associated with standard products, but can be applied to standard services too.
Page 73 of 78
A standard unit should have exactly the same input resources (direct materials, direct labor time) as
all other similar units, and these resources should cost exactly the same. Standard units should
therefore have the same cost.
Standard cost
A standard cost is a predetermined unit cost based on expected direct materials quantities and
expected direct labor time, and priced at a predetermined rate per unit of direct materials and rate per
direct labor hour and rate per hour of overhead.
Standard costs of products are usually restricted to production costs only, not administration and selling
and distribution overheads.
Overheads are normally absorbed into standard production cost at an absorption rate per direct labor
hour.(if absorption costing is used)
 Example 01:
The standard cost of a Product XYZ might be (if absorption costing is used):
Rs.
Rs.
Direct materials:
Material A: 2 litres at Rs.4.50 per litre
9.00
Material B: 3 kilos at Rs.4 per kilo
12.00
21.00
Rs.
Rs.
Direct labor
Grade 1 labor: 0.5 hours at Rs.20 per hour
10.00
Grade 2 labor: 0.75 hours at Rs.16 per hour
12.00
22.00
Variable production overheads: 1.25 hours at Rs.4 per hour
5.00
Fixed production overheads: 1.25 hours at Rs.40 per hour
50.00
Standard (production) cost per unit
98.00
Who sets standard costs?
Standard costs are set by managers with the expertise to assess what the standard prices and rates
should be. Standard costs are normally reviewed regularly, typically once a year as part of the annual
budgeting process.
• Standard prices for direct materials should be set by managers with expertise in the purchase costs of
materials. This is likely to be a senior manager in the purchasing department (buying department).
• Standard rates for direct labor should be set by managers with expertise in labor rates. This is likely to be a
senior manager in the human resources department (personnel (HR) department).
• Standard usage rates for direct materials and standard efficiency rates for direct labor should be set by
managers with expertise in operational activities. This may be a senior manager in the production or
operations department, or a manager in the technical department.(Production deparment)
• Standard overhead rates should be identified by a senior management accountant, from budgeted overhead
costs and budgeted activity levels that have been agreed in the annual budgeting process (at the beginning of
the period)The uses of standard costing
Standard costing has four main uses.
• It is an alternative system of cost accounting. In a standard costing system, all units produced are recorded
at their standard cost of production.
• When standard costs are established for products, they can be used to prepare the budget.
• It is a system of performance measurement. The differences between standard costs (expected costs) and
actual costs can be measured as variances. Variances can be reported regularly to management, in order to
identify areas of good performance or poor performance.
• It is also a system of control reporting. When differences between actual results and expected results (the
budget and standard costs) are large, this could indicate that operational performance is not as it should be,
and that the causes of the variance should be investigated. Management can therefore use variance reports
to identify whether control measures might be needed, to improve poor performance or continue with good
performance.
Page 74 of 78
Just because you cannot see the air, you do not stop breathing. Similarly, just because you cannot see ALLAH,
does not mean you stop believing.
Variances and controllability
The principle of controllability should be applied in any performance management system
When variances are used to measure the performance of an aspect of operations, or the performance of
a manager, they should be reported to the manager who is:
• responsible for the area of operations to which the variances relate, and
• able to do something to control them.
Deriving a standard cost
Deriving the standard usage for materials
The standard usage for direct materials can be obtained by using:
• historical records for material usage in the past, or
• the design specification for the product
Deriving the standard efficiency rate for labor
The standard efficiency rate for direct labor can be obtained by using:
• historical records for labor time spent on the product in the past, or
• making comparisons with similar work and the time required to do this work, or
• ‘time and motion study’ to estimate how long the work ought to take. (Time and motion study means observe
the employees in normal working environment to get the standard of time)
Deriving the standard price for materials
The standard price for direct materials can be estimated by using:
• historical records for material purchases in the past, and
• allowing for estimated changes in the future, such as price inflation and any expected change in the trade
discounts available
Deriving the standard rate of pay for labor
Not all employees are paid the same rate of pay, and there may be differences to allow for the experience
of the employee and the number of years in the job (means experience). There is also the problem that
employees may receive an annual increase in pay each year to allow for inflation, and the pay increase
may occur during the middle of the financial year.
• The standard rate of pay per direct labor hour will be an average rate of pay for each category or grade of
employees.
• The rate of pay may be based on current pay levels or on an expected average pay level for the year, allowing
for the expected inflationary pay rise during the year.
Types of standard & their behavioral aspects
Standards are predetermined estimates of unit costs but how is the level of efficiency inherent in the
estimate determined? Should it assume perfect operating conditions or should it incorporate an allowance
for waste and idle time? The standard set will be a performance target and if it seen as unattainable this
may have a detrimental impact on staff motivation. If the standard set is too easy to attain there may be
no incentive to find improvements.
There are four types of standard, and any of these may be used in a standard costing system. One
of the purposes of standard costing is to set performance standards that motivate employees to improve
performance. The type of standard used can have an effect on motivation and incentives. The types of
standards and their behavioral aspects are given below:
1. Ideal standards.
These assume perfect operating conditions. No allowance is made for wastage, labor inefficiency or
machine breakdowns. The ideal standard cost is the cost that would be achievable if operating conditions
and operating performance were perfect. In practice, the ideal standard is not achieved.
Ideal standards are unlikely to be achieved. They may be very useful as long term targets and may
provide senior managers with an indication of the potential for savings in a process but generally the
ideal standard will not be achieved. Consequently, the reported variances will always be adverse.
Employees may be becoming de- motivated when their performance level is always worse than standard
and they know that the standard is unachievable.
Page 75 of 78
2. Attainable standards.
These assume efficient but not perfect operating conditions. An allowance is made for waste and
inefficiency. However, the attainable standard is set at a higher level of efficiency than the current
performance standard, and some improvements will therefore be necessary in order to achieve the
standard level of performance.
Attainable standards are the most likely to motivate employees to improve performance as they
are based on challenging but attainable targets. It is for this reason that standards are often based
on attainable conditions. However, a problem with attainable standards is deciding on the level of
performance that should be the target for achievement. For example, if an attainable standard provides
for some improvement in labor efficiency, should the standard provide for a 1% improvement in efficiency,
or a 5% improvement, or a 10% improvement?
3. Current standards.
These are based on current working conditions and what the entity is capable of achieving at the
moment. Current standards do not provide any incentive to make significant improvements in
performance, and might be considered unsatisfactory when current operating performance is considered
inefficient.
Current standards may be useful for producing budgets as they are based on current levels of
efficiency and may therefore give a realistic guide to resources required in the production
process. However current standards are unlikely to motivate employees to improve their performance,
unless there are incentives for achieving favorable variances (for achieving results that are better than the
standard), such as annual cash bonuses.
4. Basic standards.
These are standards which remain unchanged over a long period of time (out dated standards
prepared sometimes in past). Variances are calculated by comparing actual results with the basic
standard, and if there is a gradual improvement in performance over time, this will be apparent in an
improving trend in reported variances.
Basic standards will not motivate employees to improve their performance as they are based on
achievable conditions at some time in the past. They are also not useful for budgeting because they will
often be out of date. In practice, they are the least common type of standard.
 Example 02:
A company produces bookshelves. Each bookshelf requires three planks of wood. A box
of wood contains 15 planks and costs Rs.45.
Currently 20% of wood is wasted during production. Management would like to reduce this
wastage to 10%.
Calculate a standard material cost for a bookshelf based on
a) Ideal conditions
Standard cost per plank = Rs.45/15 planks = Rs.3 per
plank
Ideal standard: 3 planks  Rs.3 = Rs.9 per bookshelf
b) Current conditions
Current standard: 3/0.80 planks = 3.75 planks at Rs.3 = Rs.11.25 per bookshelf
c) Attainable conditions
Attainable or target standard: 3/0.9 = 3.33 planks at Rs.3 = Rs.10 per bookshelf
Reviewing standards
How often should standards be revised? Standards should be reviewed regularly.
There are several reasons why standards should be revised regularly.
Regular revision leads to standards which are meaningful targets that employees may be motivated to
achieve (for example, through incentive schemes).
Variance analysis is more meaningful because reported variances should be realistic.
In practice, standards are normally reviewed annually. Standards by their nature are long-term
averages and therefore some variation is expected over time. The budgeting process can therefore be
used to review the standard costs in use.
ALLOWING FOR WASTE AND IDLE TIME
Materials wastage in standard costing
Waste is an unavoidable feature of some production processes. The actual amount of materials wasted
may vary from one period to another, but there may be a standard rate of wastage or a ‘normal’ rate of
loss which is a measure of the average rate of wastage or loss.
An allowance for expected loss can be included in a standard cost. The standard cost can be based on the
expected quantity of input materials required to produce one unit of output
Page 76 of 78
The believer is a mirror to his faithful brother. He protects him against loss and defends him behind his back.
[Hadith]
 Example 03:
A company manufactures a product in a process production system. There is some wastage in production,
and normal loss is 10% of the number of units input to the process. One unit of raw material is required
to produce one unit of finished goods.
The standard price per unit of direct material is Rs.4.50 per unit.
a) If an ideal standard is used, and the standard does not provide for any loss in
process, standard direct material cost per unit of output would be as follows
Ideal standard
No loss; therefore, standard cost =
1 unit of direct materials at Rs.4.50 per unit of material = Rs.4.50 per unit of output.
b) If the standard cost allows for a loss of 10% of input materials in producing each
unit of output, then Standard Direct material cost per unit of output would be:
Attainable or current standard: allow for 10% loss
Standard input to produce one unit of = 1/0.9 units = 1.111 units. Therefore, standard
cost = 1.111 units of materials at Rs.4.50 per unit = Rs.5 per unit of output.
 Example 04:
A company produces sandwiches. Each sandwich requires two slices of bread and a loaf (packet) of bread
contains 24 slices. Each loaf of bread costs Rs.6. It is estimated that currently 20% of bread is wasted.
Management would like to reduce this wastage to 10%.
Calculation of a standard material cost for a sandwich based on various conditions are given below
a) Ideal conditions
Standard cost per slice of bread = Rs.6/24
slices = Rs.0.25
Ideal standard: 2 slices  Rs.0.25 = Rs.0.50
b) Current conditions
Current standard: 2/0.80 slices = 2.5 slices at Rs.0.25 = Rs.0.625
c) Attainable conditions
Attainable or target standard: 2/0.9 = 2.22 slices at Rs.0.25 = Rs.0.555.
Note that the current and attainable standard costs include an allowance for wastage, and a materials
usage variance will occur only if the actual wastage rate differs from the standard wastage rate.
Idle time and standard costing
Idle time occur when the direct labor employees are being paid but have no work to do. The causes of idle
time may be:
• A breakdown in production, for example a machine breakdown that halts the production process
• Time spent waiting for work due to a bottleneck or hold-up in the production process (e.g. no electricity or
generator is without fuel)
• Running out of a vital direct material, and having to wait for a new delivery of the materials from a supplier.
• A lack of work to do due to a lack of customer orders.
A feature of idle time is that it is recorded, and the hours ‘lost’ due to idle time are measured.
Sometimes idle time may be an unavoidable feature of the production process, so that an allowance for
idle time is included in the standard cost.
Methods of including idle time in standard costs
There are different ways of allowing for idle time in a standard cost.
• Method 1. Include idle time as a separate element of the standard cost, so that the standard cost of idle time
is a part of the total standard cost per unit.
• Method 2. Allow for a standard amount of idle time in the standard hours per unit for each product. This is
the same approach described above for materials wastage and standard costing. The standard hours per unit
therefore include an allowance for expected idle time.

 Example 05:
A company manufactures Product X. Due to the nature of the production process, there is some idle time
and it has been estimated that the ‘normal’ amount of idle time is 10% of hours worked.
Ignoring idle time, the standard time to make 1 unit of Product X is 0.36 hours. Labor is paid Rs.18 per
hour.
Page 77 of 78
This means that the labor time to make 1 unit of product X is 0.36/0.90 = 0.40 hours, of which
0.04 hours are idle time.
There are two ways of making an allowance for in the standard cost the expected idle time.
Method 1: Include idle time as a separate element of the standard cost. The standard cost per unit will
include the following items:
Rs.
Active hours worked: 0.36 hours  Rs.18 per hour
6.48
Idle time: 0.04 hours  Rs.18 per hour
0.72
7.20
Method 2: Include an allowance for expected idle time in the standard hours per unit for each product.
Standard cost = 0.40 hours  Rs.18 per hour = Rs.7.20
Example:A company manufactures Product Y. Due to the nature of the production process, there is some
idle time and it has been estimated that the ‘normal’ amount of idle time is 20% of hours worked.
Ignoring idle time, the standard time to make 1 unit of Product Y is 0.56 hours. Labor is paid Rs.30 per
hour.
Calculate the standard cost of the expected idle time using each of the following three methods:
i. Include idle time as a separate element of the standard cost
ii. Include an allowance for expected idle time in the standard hours and standard
cost
The labor time to make 1 unit of product X is 0.56/0.80 = 0.70 hours, of which 0.14 hours are idle time.
i. Include idle time as a separate element of the standard
cost.
The standard cost per unit will include the following items:
Rs.
Active hours worked: 0.56 hours  Rs.30 per hour
16.80
Idle time: 0.14 hours  Rs.30 per hour
4.20
21.00
ii. Include an allowance for expected idle time in the standard hours and in
standard cost.
Standard cost = 0.70 hours  Rs.30 per hour = Rs.21.00
Page 78 of 78
Do start with BISMILLAH!!
Marginal and Absorption Costing
In absorption costing fixed production overheads are included in cost of production (and therefore to
closing stock). Therefore fixed production overheads are charged in the profit and loss account of the
period in which the inventory is sold (Fixed production overheads are treated as product cost).
In Marginal costing fixed production overheads are not included in cost of production (and therefore to
closing stock).Therefore fixed production overheads are treated as period cost and are charged in the
profit and loss account of the period in which they are incurred. (Fixed production overheads are
treated as period cost).
Formats of marginal and absorption costing income statements:
Total absorption costing income statement for the period (assumed figures):
Rs.
Sales
Cost of sales
Opening inventory at full production cost
Production costs
Direct materials
Direct labour
Variable Production overheads
Fixed Production overheads
Less: Closing inventory at full production cost
cost of sales (unadjusted)
(Under)/over absorption:
Fixed production overheads absorbed / charged / applied
Actual Fixed production overheads incurred (assumed)
Over-absorbed overheads
Rs.
430,000
8,000
60,000
30,000
40,000
60,000
198,000
(14,000)
(184,000)
60,000
(55,000)
5,000
(179,000)
251,000
(178,000)
73,000
Gross Profit (adjusted)
Administration, selling and distribution costs
Profit for the period
Marginal costing income statement for the period (assumed figures):
Rs.
Sales
Variable cost of sales:
Opening inventory at variable production cost
Variable production costs
Direct materials
Direct labour
Variable production overheads
Less: Closing inventory at variable production cost
Rs.
430,000
5,000
60,000
30,000
15,000
110,000
(8,000)
Page 1 of 21
Gross contribution
Variable selling and distribution costs
Net Contribution
Fixed Costs:
Production costs
Administration costs (usually 100% fixed costs*)
Selling and distribution costs
Profit for the period
102,000
338,000
18,000
320,000
120,000
70,000
90,000
280,000
40,000
*it is generally assumed if nothing is mentioned.
Q. 1 Mingora Manufacturing makes and sells a single product:
Selling price per unit
Variable cost:
Direct Material
Direct labor per unit
Variable production overhead per unit
Rs
150
35
25
10
70
50
120
Fixed overhead per unit (see below)
Total absorption cost per unit
Normal production (Budgeted)
2,200 units per month
Budgeted fixed production overhead
Rs110,000 per month
Fixed overhead absorption rate Rs 110,000/2,200 units =Rs 50 per unit
The following data relates to July and august:
July
August
Fixed production costs
Rs.110,000
Rs.110,000
Production
2,000 units
2,500 units
Sales
1,500 units
3,000 units
There was no opening inventory in july
This means that there is no closing inventory at the end of August as production in the two months
(2,000+2,500units=4,500 units) is the same as the sales (1,500+3,000 units=4,500 units)
Requirement:
Prepare an income statement by using;
➢ Marginal Costing
➢ Absorption Costing
Page 2 of 21
Do end with ALHAMDULILAH!!
Q. 2 Following information has been extracted from the financial records of ATF Limited:
Production during the year
Units
35,000
Finished goods at the beginning of the year Units
3,000
Finished goods at the end of the year
Units
1,500
Sale price per unit
Rs.
200
Fixed overhead cost for the year
Rs.
1,000,000
Administration and selling expenses
Rs.
200,000
Annual budgeted capacity of the plant
Units
40,000
The actual cost per unit, incurred during the year, was as follows:
Rupees
Material
70
Labor
40
Variable overheads 30
Company uses FIFO method for valuation of inventory. The cost of opening finished goods inventory
determined under the absorption costing method system was Rs. 450,000. Fixed overhead constituted
16% of the total cost last year.
Required:
(a) Prepare profit statements for the year, under absorption and marginal costing systems.
(b) Prepare reconciliation between the net profits determined under each system. (12 Marks)
Note:
If there is no indication, then budgeted fixed overheads are equal to actual fixed overheads.
If there is no information then assume administrative and selling expenses as fixed.
Q. 3 XY Limited manufactures and sells a single product. The selling price and costs for the year ended
31 December 2013 were as follows:
Rs. per unit
1,600
630
189
220
165
Selling price
Direct material
Direct labour
Production overheads (40% fixed)
Selling and distribution overheads (60% fixed)
Other information is as follows:
(a)
During the year, 12,000 units were produced.
(b)
The opening and closing stocks were 4,000 and 3,000 units respectively
(c)
Fixed overhead cost per unit is based on normal capacity which is 15,000 units.
(d)
Overhead costs have increased by 10% over the previous year and raw material and labour by
5%.
(e)
The company uses FIFO method for costing its inventory.
Required:
• Profit and loss account for the year ended 31 December 2013 under absorption costing
and marginal costing.
(14)
• Reconciliation of profit worked out under the two methods.
(02)
Note: if there is no information then assume that normal capacity is equal to budgeted capacity.
Page 3 of 21
Q. 4 Silver limited (SL) produces and markets a single product. Following information is available from
SL’s records for the month of March 2012
Volumes:
Sales
100,000 Units
Production
120,000 Units
Standard cost;
Direct material per unit
0.8 Kg @ Rs. 60/Kg
Labor per unit
27 Minutes @ Rs. 80/Hour
Variable production overheads
Rs. 40/Labor hour
Variable selling expenses
Rs. 15/Unit
Fixed selling expenses
Rs. 800,000
Fixed production overheads at a normal output level of 105,000 units per month are estimated at
Rs. 2,100,000. The estimated selling price is Rs. 180/unit.
Required:
Assuming there is no opening stock; prepare income statement for the month of March using:
➢ Absorption Costing
➢ Marginal Costing
Page 4 of 21
Do appreciate with Subhan ALLAH!!
Solutions
A.1
Marginal Costing Income Statement
July
August
Sales:
1,500 × 150
1,500 × 150
Less: Variable Cost of Sales
Opening Inventory
Variable Production Cost
Direct Material:
2,000 × 35 / 2,500 × 35
Direct Labour:
2,000 × 25 / 2,500 × 25
V-OH:
2,000 × 10 / 2,500 × 10
Closing Inventory
(500 × 70)
Variable Cost of Sale
Contribution
Fixed Production cost
Gross Profit
225,000
450,000
--
35,000
70,000
50,000
20,000
(35,000)
(105,000)
120,000
(110,000)
10,000
87,500
62,500
25,000
-(210,000)
240,000
(110,000)
130,000
Absorption Costing Income Statement
July
August
Sales:
1,500 × 150
3,000 × 150
Less: Cost of Sales
Opening Inventory
Total Production Cost
Direct Material:
2,000 × 35 / 2,500 × 35
Direct Labour:
2,000 × 25 / 2,500 × 25
V-OH:
2,000 × 10 / 2,500 × 10
F-OH: (absorbed)
2,000 × 50 / 2,500 × 50
Closing Stock
(500 × (70 + 50))
Unadjusted Cost of Sale
225,000
450,000
--
60,000
70,000
50,000
20,000
100,000
(60,000)
(180,000)
87,500
62,500
25,000
125,000
-(360,000)
Under (Over) absorbed
(110,000 – 100,000)
(110,000 – 125,000)
Adjusted Cost of Sales
Gross Profit
(10,000)
(190,000)
35,000
(15,000)
(345,000)
105,000
Page 5 of 21
Reconciliation of Profits
July
Profit as per Absorption Costing
Closing Stock – Absorption Costing
Opening Stock – Absorption Costing
Opening Stock – Marginal Costing
Closing Stock – Marginal Costing
Profit as per Marginal Costing
35,000
(60,000)
--35,000
10,000
August
105,000
60,000
(35,000)
130,000
A.2
Absorption Costing:
Sales (3,000 + 3,500 – 1,500= 36,500 × 200)
Less: Cost of Sales
Opening Stock (given)
Production Cost (70 + 40 + 30 + 25*) × 35,000
Closing Stock (165 × 1,500)
*[1,000,000 / 40,000]
Under absorbed (5,000 × 25)
Cost of Sales – Adjusted
Gross Profit
Admin & Selling
Net profit
Marginal Costing:
Sales
Variable cost of Sales:
Opening Stock (450,000 × 84%)
Production cost (35,000 × 140)
Closing Stock (1,500 × 140)
Contribution
Fixed cost:
Production Cost
Admin & Selling Cost
Reconciliation:
Profit As per Absorption costing.
Closing As per A.C
Opening As per A.C
Closing As per M.C
Opening As per M.C
Profit as per Marginal costing
7,300,000
450,000
5,775,000
(247,500)
(5,977,500)
(125,000)
(6,102,500)
1,197,500
(200,000)
997,500
7,300,000
378,000
4,900,000
(210,000)
(5,068,000)
2,232,000
(1,000,000)
(200,000)
1,032,000
997,500
(247,500)
450,000
210,000
(378,000)
1,032,000
Page 6 of 21
Hope with INSHA ALLAH !!
A.3
(a) XY Limited
XY Limited
Absorption Costing:
Sales (4,000 + 12,000 – 3,000) × 1,600
Cost of Sales:
Opening Stock (4,000 × 980)
Production Cost:
Material (12,000 × 630)
Labour (12,000 × 189)
Variable overheads (12,000 × 132)
Fixed overheads (12,000 × 88)
Closing Stock (3,000 × 630 + 189 + 132 + 88=1,039)
Under applied (15,000 × 88 – 1,056,000)
Cost of Sales – Adjusted
Gross Profit
Selling & Distribution (13,000 × 165)
Net profit
Calculation of under / over applied overheads:
Fixed overheads (actual)
20,800,000
3,920,000
7,560,000
2,268,000
1,584,000
1,056,000
12,468,000
(3,117,000)
1,320,000 Fixed overheads (applied)
Cost of sales (bal)
Marginal Costing:
Sales (13,000 × 1,600)
Variable Cost of Sales:
Opening Stock (4,000 × 900)
Variable Production Cost:
Material (12,000 × 630)
Labor (12,000 × 189)
Variable overheads (12,000 × 132)
Closing Stock (3,000 × 951)
Gross contribution
Variable Selling & Distribution (13,000 × 165 × 40%)
Net Contribution
Fixed Cost:
Production (15,000 × 88*)
Selling & Admin (13,000 × 165 × 60%)
Profit
(13,271,000)
(264,000)
(13,535,000)
7,265,000
(2,145,000)
5,120,000
1,056,000
264,000
20,800,000
3,600,000
7,560,000
2,268,000
1,584,000
11,412,000
(2,853,000)
(12,159,000)
8,641,000
(858,000)
7,783,000
(1,320,000)
(1,287,000)
5,176,000
Page 7 of 21
*[1,320,000 / 15,000 = 88]
Reconciliation:
Profit As per Absorption costing
Closing Stock A.C
Opening Stock A.C
Closing Stock M.C
Opening Stock M.C
Profit as per Marginal costing
5,120,000
(3,117,000)
3,920,000
2,853,000
(3,600,000)
5,176,000
Last year per unit rates were:
Material
630/105*100 = 600
Labor
189/105*100 = 180
VOH
132/110*100 = 120
= 900
951
FOH
88/110*100 = 80
1,039
= 980
A. 4
Silver Ltd.
Absorption Costing
Per Unit
Sales [100,000 × 800]
Cost of Sales:
Opening Stock
Cost of Production:
Direct Material: (120,000 × 0.8 × 60)

Direct Labour: 120,000  80 


Variable OH: 120,000  40 

27 
60 
27 
60 
 2,100,000

 120,000
Fixed OH: 
 105,000

Less: Closing Stock 122 × 20,000)
Cost of Sales
Less: Over absorbed [2,400,000 – 2,100,000]
Gross Profit
Selling Expenses
Variable (100,000 × 15)
Fixed (Given)
Net Profit
18,000,000
Nil
5,760,000
48
4,320,000
36
2,160,000
18
2,400,000
102
20
14,640,000
122
(2,440,000)
12,200,000
(300,000)
6,100,000
1,500,000
800,000
3,800,000
Page 8 of 21
And INSHA ALLAH LIFE will be blessed by ALLAH
Marginal Costing
Sales
Variable Cost of Sales
Opening Stock
Variable Cost of Production:
Direct Material
Direct Labour
Variable OH
Closing Stock (20,000 x 102)
Gross contribution
Variable Selling Expenses (100,000 × 15)
Net Contribution
Fixed cost:
Production
Selling
Net Profit
Reconciliation:
Profit As per Absorption costing
Closing Stock A.C
Closing Stock M.C
Profit as per Marginal costing
18,000,000
Nil
5,760,000
4,320,000
2,160,000
12,240,000
(2,040,000)
10,200,000
7,800,000
(1,500,000)
6,300,000
(2,100,000)
(800,000)
3,400,000
3,800,000
(2,440,000)
2,040,000
3,400,000
Page 9 of 21
Extra practice questions:
1. Question
A division of Electronic Appliances Limited sold 6,000 units of refrigerators during the year ended
September 30, 2008, the sale price being Rs. 24,000 per unit.
The opening work in progress comprised of 500 units which were complete as regards material but only
40% complete as to labour and overheads. The closing work in progress comprised of 1,200 units which
were also complete as regards material but only 50% complete as to labour and overheads. The finished
goods inventory was 800 units at the beginning of the year and 1000 units at the year end.
The work in progress account had been debited during the year with the following costs:
Rs. In ‘000’
Direct material
83,490
Direct labour
14,256
Variable overheads
10,890
Fixed overheads
17,490
As compared to the previous year, the costs per units have increased as follows:
Direct material
10%
Direct labour
8%
Variable overheads
10%
Fixed overheads
6%
The selling and administration cost for the year were:
Rupees
Variable cost per unit sold
Fixed costs
1,600
12,000,000
Required:
(a)
Compute the cost per unit by element of cost and in total, assuming FIFO basis.
(b)
Prepare profit statements on the basis of:
(c)
(i)
Absorption costing
(ii)
Marginal costing.
Prepare a reconciliation between profits.
Page 10 of 21
We worry about tomorrow as if its guaranteed to come.
2. Question
The following budgeted profit statement has been prepared using absorption costing principles.
January to June 20X7
Rs. 000
July to December 20X7
Rs. 000
Sales
Rs. 000
Rs. 000
540
Opening stock
360
100
160
Direct materials
108
36
Direct labour
162
54
90
30
460
280
160
80
Production costs:
Overheads
Closing Stock
Gross profit
300
200
240
160
Production overhead:
(Over)/under absorption
(12)
12
Selling costs
50
50
Distribution costs
45
40
Administration costs
80
80
Net profit
163
182
77
(22)
Sales units
15,000
10,000
Production units
18,000
6,000
The members of the management team are concerned by the significant change in profitability between
the two six-month periods. As management accountant, you have analyzed the data upon which the
above budget statement has been produced, with the following results.
The production overhead cost comprises both a fixed and a variable elements, the latter appears to be
dependent on the number of units produced. The fixed element of the cost is expected to be incurred at a
constant rate throughout they year.
The selling costs are fixed.
The distribution cost comprises both fixed and variable element, the latter appears to be dependent on
the number of units sold. The fixed element of the cost is expected to be incurred at a constant rate
throughout the year.
The administration costs are fixed.
Required:
(a)
Present the above budgeted profit statement in marginal costing format.
(b)
Reconcile each of the six-monthly profit/loss values reported respectively under marginal and
absorption costing.
Page 11 of 21
Q.3
Frappe Limited (FL) manufactures and sells a single product Sigma. Following information is
available:
During the year ended 31 December 2018, FL sold 5,500 units at Rs. 25,000 per unit. Details of opening
and closing work in process and finished goods are as follows:
Percentage of completion
Number of units
Work in process:
Opening
Closing
Finished goods:
Opening
Closing
Direct material
Conversion costs
400
800
100%
100%
60%
40%
600
900
-
-
The work in process account had been debited during the year with the following costs:
Rs. in '000
Direct material
82,350
Conversion costs (including fixed overheads of Rs. 16.762 million)
44,217
Variable operating costs amounted to Rs. 500 per unit whereas fixed operating costs for the year were
Rs. 7,500,000.
Effective from 1 January 2018, direct material price and conversion costs were increased by 5% and 10%
respectively.
FL uses FIFO method for valuation of its inventories.
Required:
(c) Prepare statements of equivalent units and cost per equivalent unit.
(d) Prepare profit statements on the basis of:
marginal costing
absorption costing
(Round off all figures to the nearest rupee amount)
Page 12 of 21
ALHAMDULILAH for the chances ALLAH has given us to be able to ask for forgiveness.
Ans 1. Electronic Appliances Limited
a) Cost per unit:
Work in Process
b/d(100%M;40% CC)
Input
Material
Labor
V-OH
F-OH
b/d
Production (WIP)
500
Output 6200
Units
500
6,900
Amt
Output
Units
6,200
Amt
83,490
14,256
10,890
17,490 c/d(100%M;50%CC)
1,200
Finished goods-Units
800 Sold
6,000
6,200
c/d
1,000
Equivalent Units:
Material
Conversion Cost
300 (60%)
5700
5700
5,700
c/d WIP 1200
1200
6,900
Calculation of Rate unit [30-9-2008]
Material
=
83,490
Labor
=
14,256
V-OH
=
10,890
Fixed OH
=
17,490
Total
Rates applicable in previous period:
Current [2008]
Material
12,100
Labor
2,160
V-OH
1650
Marginal cost/unit
15,910
Fixed OH
2,650
Absorption cost/unit
18,560
/6,900
/6,600
/6,600
/6,600
b) Income Statement (Absorption Costing)
For the year ended 30-9-2008
Sales (6000x24)
Cost of Sales:
Opening Stock [800x17,000]
Cost of good Manufactured (W-1)
Closing Stock [1000x18,560]
Gross Profit
600 (50%)
6,600
=
=
=
=
12,100
2,160
1,650
2,650
18,560
Previous [2007]
11,000
2,000
15,00
14,500
2,500
17,000
unit
unit
unit
unit
unit
[12100/110x100]
[2160/108x100]
[1650/110x100]
[2650/106x100]
‘000’
144,000
13,600
114,430
(18,560)
(109,470)
34,530
Page 13 of 21
Admin &Selling expense
Variable (6000x1,600)
Fixed
Net Profit
Income Statement (Marginal Costing)
For the year ended 30-9-2008
Sales[6000x24]
Variable Cost of Sales
Opening Stock
[14,500x800]
+Variable COGM.
(W-2)
-Closing stock
[1000x15,910]
Gross Contribution
Variable Selling & Admin expense[6000x1,600]
Net Contribution
Fixed cost:
Production
Selling and Admin
Net Profit
c) Reconciliation between profits :
Profit As per Absorption Costing
F.G
Opening stock as per Absorption costing
Closing stock as per Absorption costing
WIP Opening stock as per Absorption costing
Closing stock as per Absorption costing
F.G
Opening stock as per Marginal costing
Closing stock as per Marginal costing
WIP Opening stock as per Marginal costing
Closing stock as per Marginal costing
Profit As per Marginal costing
W-1) Cost of Goods Manufactured
Raw Material
Direct Labor
Variable OH
Fixed OH
Total Manufacturing Cost
Opening WIP
[500X11000]+[(500x40%)x(2,000+1,500+2,500
Closing WIP
[1,200x12,100]+[(1,200x50%)x(2,160+1,650+2,650)]
Cost of good manufactured
OR FIFO [Cost of 6200 units manufactured]
500 units
+300x(2160+1650+2650)
+5700x18560
Total
(9,600)
(12,000)
12,930
‘000’
144,000
11,600
98,030
(15,910)
(93,720)
50,280
(9,600)
40,680
(17,490)
(12,000)
11,190
12,930
13,600
(18,560)
6,700
(18,396)
(11,600)
15,910
(6,200)
16,806
11,190
[Absorption Costing]
83,490
14,256
10,890
17,490
126,126
6,700
(18,396)
114,430
6700
1,938
105,792
114,430
Page 14 of 21
The DUNIYA is not the RESTING place it is the TESTING place.
W-2) Variable Cost of goods Manufactured
[marginal Costing]
Raw Material
Direct Labor
V-OH
Total Variable Manufacturing Cost
Opening WIP
(500x11,000)+[(500x40%)x(2,000+1500)]
Closing WIP
(1,200X12100)+[(1,200X50%)X(2,160+1,650)]
Variable Cost of goods Manufactured
OR Variable Cost of 6200 units
Manufactured
500
6200
+300X (2160+1650)
1,143
+5700X15,910
90,687
Total
98030
83,490
14,256
10,890
108,636
6,200
(16,806)
98,030
Answer 2 (a)
January – June
Rs. 000
Sales
July – December
Rs. 000
Rs. 000
Rs. 000
540
Opening stock (Rs. 18 (W1) × 5,000/8,000 (W4))
360
90
144
Direct materials
108
36
Direct labour
162
54
54
18
414
252
(144)
(72)
Production costs
Variable overhead (Rs. 3 (W1) × 18,000 / 6,000)
Closing stock (Rs. 18 (W1) × 8,000/4,000 (W4))
Variable distribution cost (Rs. 1 (W5) × 15,000/10,000)
Contribution
270
180
270
180
15
10
255
170
Fixed costs
Production overhead (W2)
24
24
Selling costs
50
50
Distribution costs (W5)
30
30
Administration costs
80
80
Budgeted profit / (loss) under marginal costing
184
184
71
(14)
Workings:
1.
Fixed and variable costs per unit
Rs.
Direct materials (Rs. 108,000 ÷ 18,000)
6
Direct labour (Rs. 162,000 ÷ 18,000)
9
Variable overhead (W2)
3
Page 15 of 21
Variable costs per unit
18
Fixed cost per unit (W3)
2
Total cost per unit
2.
20
Fixed and variable overheads
January – June
July – December
Rs. 000
Rs. 000
Overhead absorbed
(Over)/under absorption
Actual overhead
90
30
(12)
12
78
42
Using the high-low method, we can determine the fixed and variable elements of the production
overheads.
Production
Units
Production
Overheads
Rs. 000
Rs. 000
High
18,000
78,000
Low
6,000
42,000
12,000
36,000
Variable production overhead cost per unit =
Rs. 36,000
= per unit
12,000
When 18,000 units are produced, total variable production overheads = 18,000 × Rs. 3 =
Rs. 54,000.
Since total cost
= Fixed cost + Variable costs
Rs. 78,000
= Fixed costs + Rs. 54,000
 Fixed costs
= Rs. 78,000 – Rs. 54,000
= Rs. 24,000
3.
Total overhead cost per unit
January – June, total overheads = Rs. 90,000
January – June, production units = 18,000
 Total overhead cost per unit =
Rs. 90,000
= Rs. 5 per unit
18,000
In (W2) we established that the variable overhead cost per unit = Rs. 3. Therefore the fixed
overhead cost per unit = Rs. 5 – Rs. 3 = Rs. 2.
4.
Opening and closing stock level:
January –
June
July –
December
Units
Units
Opening stock
(Rs. 100,000 ÷ Rs. 20 (W1))
5,000
(Rs. 160,000 ÷ Rs. 20 (W1))
8,000
8,000
(Rs. 80,000 ÷ Rs. 20 (W1))
4,000
Closing stock
(Rs. 160,000 ÷ Rs. 20 (W1))
Page 16 of 21
We should be Proud to be Muslim. ALHAMDULLILAH!
5.
Distribution Cost
Sales Units
Distribution
Cost
Rs. 000
Rs. 000
High
15,000
45,000
Low
10,000
40,000
5,000
5,000
Variable distribution cost per unit =
Rs. 5,000
= Rs. 1 Per unit
5,000
Fixed costs = Rs. 45,000 – (15,000 × Rs. 1)
= Rs. 45,000 – Rs. 15,000
= Rs. 30,000
Answer (b)
Reconciliation:
January – June
July – December
Rs. ‘000’
Rs. ‘000’
Absorption costing profit
77
(22)
O.S as per A.C
100
160
C.S as per A.C
(160)
(80)
O.S as per M.C
(90)
(144)
C.S as per M.C
144
72
71
(14)
Marginal costing profit
Solution:3
(000)
Process A/c
Units
b/d
Amount
400
Units
Finished Goods
Amount
5,800
Input(bal.)
6,200
Direct Material
Conversion Variable
Conversion Fixed
82,350
27,455
16,762
c/d
b/d
Production (bal.)
5,800
Finished Goods A/c
600
Sales
c/d
800
5,500
900
Page 17 of 21
Equivalent Units:
Finished Goods
400
5,800
5,400
c/d 800
Material
-
Conversion
160 (40%)
5,400
800
6,200
5,400
320 (40%)
5,880
Rate/Unit:
Material
= 82,350/6,200
Conversion Variable = 27,455/5,880
Conversion-Fixed
= 16,762/5,880
= 13.28
= 4.67
17.95
= 2.85
20.8
Last Year
13.28/105 ×100
4.67/110 ×100
2.85
×
110
100
= 12.65
= 4.25
16.90
= 2.6
19.5
Profit statement (Absorption Costing)
Sales (5,500 × 25,000)
Cost of sales:
Opening stock (600×19.5)
+Cost of goods manufactured:
Direct material
Conversion variable
Conversion – fixed
Opening WIP
(400 × 12.65 + 400 × 60% × 4.25 + 400 × 60% × 2.60)
Closing WIP
(800 × 13.28 + 800 × 40% × 4.67 + 800 × 40% × 2.85)
Closing stock(900×20.8)
Gross profit
Operating Expenses:
Variable (5500×500)
Fixed
Net profit
--------------- Rs” 000’’ ------------137,500
11,700
82,350
27,455
16,762
126,567
6,704
(13,030)
120,241
(18,720)
(113,221)
24,279
(2,750)
(7,500)
14,029
Page 18 of 21
ALLAH is sufficient for us.
Profit Statement (Marginal Costing)
Sales (5500  25000)
Variable Cost Of Sale:
Opening Stock (600  16.9)
Variable COGM
Direct Material
Conversion Variable
Opening WIP
(400  12.65 + 400  60%  4.25)
Closing WIP
(800  13.28+ 800  40%  4.67)
Closing Stock(900  7.95)
--------------- Rs” 000’’ ------------137,500
10,140
82,350
27,455
109,805
6,080
(12,118)
103,767
(16,155)
Gross Contribution
Variable Operating Cost(5500  500)
Net Contribution
Fixed Cost:
Production
Operating
Net Profit
(97,752)
39,748
(2,750)
36,998
(16,762)
(7,500)
12,736
MARGINAL COST AND MARGINAL COSTING
Marginal cost
The marginal cost of an item is its variable cost (means variable cost is also called as marginal cost)
Marginal production cost = Direct materials + Direct labor + Direct expenses (if any) + Variable production
overhead.
It is usually assumed that direct labor costs are variable (marginal) costs, but often direct labor costs might be
fixed costs, and so would not be included in marginal cost. E.g. If the workers are not being paid on piece rate
basis but rather on fixed salary (monthly or weekly)
Variable overhead costs might be difficult to identify. In practice, variable overheads might be measured using a
technique such as high/low analysis or linear regression analysis, to separate total overhead costs into fixed costs
and a variable cost per unit of activity.
•
For variable production overheads, the unit of activity is often either direct labor hours or machine
hours, although other suitable measures of activity might be used.
•
For variable selling and distribution costs, the unit of activity might be sales volume or sales revenue.
•
Administration overheads are usually considered to be fixed costs, and it is very unusual to come across
variable administration overheads.
In simple words…
In marginal costing the cost of the product is variable Production Cost only.
Marginal costing and its uses
Marginal costing is a method of costing with marginal costs. It is an alternative to absorption costing as a method of
costing. In marginal costing, fixed production overheads are not absorbed into product costs.
There are several reasons for using marginal costing:
•
To measure profit (or loss), as an alternative to absorption costing
•
To forecast what future profits will be
Page 19 of 21
•
To calculate what the minimum sales volume must be in order to make a
profit It can also be used to provide management with information for
decision making (means used in breakeven analysis, target profit analysis and
decision making of limiting factor or make or buy decision etc.)
Its main uses, however, are for planning (for example, budgeting), forecasting and decision making as it deals
with costs that can be directly changed in the short term.
Assumptions in marginal costing
For the purpose of marginal costing, the following assumptions are normally made:
•
•
Every additional unit of output or sale, or every additional unit of activity, has the same variable cost as
every other unit. In other words, the variable cost per unit is a constant value.
•
Fixed costs are costs that remain the same in total in each period, regardless of how many units are
produced and sold.
•
Costs are either fixed or variable, or a mixture of fixed and variable costs. Mixed costs can be separated
into a variable cost per unit and a fixed cost per period.
The marginal cost of an item is therefore the extra cost that would be incurred by making and selling one
extra unit of the item. Therefore, marginal costing is particularly important for decision making as it focuses
on what changes as a result of a decision.
Contribution margin
Contribution is a key concept in marginal
costing.
Contribution margin = Sales – Variable costs
Fixed costs are a constant total amount in each period. To make a profit, an entity must first make enough
contribution to cover its fixed costs. Contribution therefore means: ‘contribution towards covering fixed costs
and making a profit’.
Total contribution margin – Fixed costs =
Profit
In simple words…
Contribution margin is sales minus all Variable costs
MARGINAL COSTING AND ABSORPTION COSTING COMPARED
The difference in profit between marginal costing and absorption costing
The profit for an accounting period calculated with marginal costing is different from the profit calculated with
absorption costing.
The difference in profit is entirely due to the differences in inventory valuation as fixed production overheads are
treated as period cost in marginal costing and as product cost in absorption costing.
The main difference between absorption costing and marginal costing is that in absorption costing, inventory cost
includes a share of fixed production overhead costs.
•
The opening inventory contains fixed production overhead that was incurred last period. Opening
inventory is written off against profit in the current period. Therefore, part of the previous period’s
costs is written off in the current period income statement provided that the opening inventory is sold
during the current year.
•
The closing inventory contains fixed production overhead that was incurred in this period. Therefore,
this amount is not written off in the current period income statement but carried forward to be written
off in the next period income statement.
Page 20 of 21
What if worldly life is not perfect? It is not Jannah. Worldly life is a test.
Always remember:
Fixed selling overhead or fixed administration overhead are written off in full as a period cost in both absorption
costing and marginal costing, and only fixed production overheads are included in inventory values.
ADVANTAGES AND DISADVANTAGES OF ABSORPTION AND MARGINAL COSTING
Advantages and disadvantages of absorption costing.
Advantages of absorption costing
•
Inventory values include an element of fixed production overheads. This is consistent with the
requirement in financial accounting that (for the purpose of financial reporting) inventory should
include production overhead costs (consistent with financial reporting i.e. IAS 2)
•
Calculating under/over absorption of overheads may be useful in controlling fixed overhead expenditure.
•
By calculating the full cost of sale for a product and comparing it will the selling price, it should be
possible to identify which products are profitable and which are being sold at a loss.
Disadvantages of absorption costing
•
Absorption costing is a more complex costing system than marginal costing.
•
Absorption costing does not provide information that is useful for decision making (like marginal
costing does).
•
Assigning of Production overheads always include an element of discretion (means whether on the basis
of machine hours or labor hours);
Advantages and disadvantages of marginal costing
Advantages of marginal costing
•
It is easy to account for fixed overheads using marginal costing. Instead of being apportioned they are
treated as period costs and written off in full as an expense the income statement for the period when
they occur.
•
There is no under/over-absorption of overheads with marginal costing, and therefore no adjustment
necessary in the income statement at the end of an accounting period.
•
Marginal costing provides useful information for decision making.
Disadvantages of marginal costing
•
Marginal costing does not value inventory in accordance with the requirements of financial reporting.
(However, for the purpose of cost accounting and providing management information, there is no
reason why inventory values should include fixed production overhead, other than consistency with the
financial accounts.) (not consistent with financial reporting i.e. IAS 2)
•
Marginal costing can be used to measure the contribution per unit of product, or the total contribution
earned by a product, but this is not sufficient to decide whether the product is profitable enough. Total
contribution has to be big enough to cover fixed costs and make a profit.(the decision as to whether the
products are generating the profit or loss cannot be made by using the marginal costing)
Page 21 of 21
Dunya is made for us but we are made for Akhira! [Alhadith]
Test joint and by product
Q.1 Cricket Chemicals Limited (CCL) is a manufacturing concern and has two production
processes. Process I produces two joint products i.e. X-1 and X-2. Incidental to the
production of joint products, it produces a by-product known as Zee. X-1 is further
processed in process II and converted into ‘X1-Plus’.
Following information has been extracted from the budget for the year ending 31 August
2019:
(i)
Process wise budgeted cost:
Direct material (500,000 liters)
Conversion cost
(ii)
Process I
Process II
-------------- Rupees -----------98,750,000
72,610,000
19,100,000
Expected output ratio from process I and selling prices:
Products
Joint product – X-1
Joint product – X-2
By-product – Zee
X1-Plus
Output ratio in process I
55 %
40 %
5%
-
Selling price (Rs. per liter)
532
120
768
Additional information:
(i)
(ii)
(iii)
(iv)
(v)
Material is added at the beginning of the process and CCL uses 'weighted average
method' for inventory valuation.
Joint costs are allocated on the basis of net realizable value of the joint products at
the split-off point. Proceeds from the sale of by-product are treated as reduction in
joint costs.
Joint product X-2 is sold after incurring packing cost of Rs. 75 per liter.
Normal production loss in process I is estimated at 5% of the input which occurs at
beginning of the process. Loss of each liter results in a solid waste of 0.7 kg which is
sold for Rs. 10 per kg. No loss occurs during process II.
Budgeted conversion cost of process I and process II include fixed factory overheads
amounting to Rs. 7,261,000 and Rs. 3,820,000 respectively.
Required:
Prepare product wise income statement for the year ending 31 August 2019. (14)
Page 1 of 35
Ans 1:
Cricket Chemicals Limited
Product wise budgeted income statement:
For the year ended 31-08-2009
-------------------Rupees in thousand------------------X1 Plus
X2
Total
200,640
101,080
301,720
Sales
COS:
Cost of Goods Manufactured
(132,970)
(113,870+19,100)
(68,715)
(54,465+14,250)
(201,685)
67,670
32,365
100,035
Gross profit
Workings:
Rs.000
19,100
X1 [261,250] (55%)
X2 [190,000] (40%)
I
500,000
ll
X1 Plus [261,250]
(55%)
Packing Cost @ 75/l
Zee [23,750] (5%) (23,750 x 120) = 2,850
N. Loss [25,000 L] (25,000 x0.7 x10) = 175
D.M
Conversion
Zee
N. Loss
98,750
72,610
(2,850)
(175)
168,335
Joint cost
Allocation:
Rs. ‘000’
Units
Sale
price/units
Sale Value
Further processing
NRV
Allocation
X1 plus
261,250
768
200,640
19,100
181,540
113,871
X2
190,000
532
101,080
14,250
(190,000x75)
86,830
54,464
268,370
168,335
Page 2 of 35
The most intelligent person is one who remembers death often [Hadith]
Test process costing
Q.1
Shahnawaz Private Limited (SPL) produces one of its products through two processes Alpha and
Beta. Following information has been extracted from the records of process Alpha for the month of
January 2016:
Quantity
Material
Conversion
Units
------ Rs. In ‘000’ ------
Opening work in process
2,500
2,713
1,499
Input during the month
10,000
10,000
5,760
Transferred to process Beta
9,000
-
-
Closing work in process
3,000
-
-
Additional information:
(i)
Materials are introduced at the beginning of the process. In respect of conversion, opening and
closing work in process inventories were 30% and 70% complete, respectively.
(ii)
Inspection is performed when the units are 60% complete. Expected rejection is estimated at 5%
of the inspected units. The rejected units are not processed further and sold at Rs. 100 per unit.
(iii)
SPL uses ‘weighted average method’ for inventory valuation.
Required:
(a)
Compute equivalent production units and cost per unit.
(b) Prepare journal entries to record the above transactions.
(05)
(06)
Q.2 ICI produces a chemical that requires two separate processes for its completion. Following
information pertains to process Z for the month of October 2018:
Kg’s
Rs. in ‘000’
2,500
4,000
Opening work in process (75% to conversion)
Costs for the month:
Received from process Y
15,000
36,000
Material added in process Z
7,500
20,000
Conversion cost incurred in process Z
22,000
Finished goods transferred to warehouse
20,000
Closing work in process (55% to conversion)
2,000
In process Z, material is added at start of the process and conversion costs are incurred evenly
throughout the process. Process losses are determined on inspection which is carried out on 70%
completion of the process. Process loss is estimated at 7% of the inspected quantity and is sold for Rs.
78 per kg.
Required:
(a) Prepare a statement of equivalent production units.
(b) Compute cost of:
i.
finished goods
ii.
closing WIP
iii.
abnormal loss/gain
(c)
Prepare accounting entries to record production gain/loss for the month.
Page 3 of 35
Ans.1
(a)
Equivalent Units:
(3M)
Material
Conversion
Output
9,000
9,000
9,000
c/d WIP
3,000
3,000
2,100 (70%)
Ab. Gain
125
(125)
(125)
11,875
10,975
Cost per Unit:
(2M)
Material
=
Conversion
=
2,713 + 10,000 − 62.5
11,875
1,499 + 5,760
10,975
=
1.065
=
0.661
1.726
(b): Journal entries
(i)
Process – Alpha
Marks
(0.5M)
Rs.(000)
10,000
Material
(ii)
Process – Alpha
10,000
(0.25M)
5,760
Conversion
(iii)
Process – Beta
5,760
(0.25M)
15,534
Process – Alpha
(iv)
Normal loss
15,534
(0.25M)
62.5
Process – Alpha
(v)
Cash
62.5
(0.25M)
50
Normal loss
(vi)
Process – Alpha
50
(1M)
216
Abnormal Gain
(vii)
Abnormal Gain
Normal loss
216
(1M)
12.5
12.5
Page 4 of 35
Every day is Mother’s day and Father’s day in Islam
Workings:
Normal Loss
Units
Amount
625
62.5 Cash
Abnormal Gain
625
62.5
Process Alpha
Abnormal Gain
Units
Amount
125
12.5 Process Alpha
Normal loss
P/L(Gain)
202.5
Process Account – Alpha
Units
500
125
625
Rs. ‘000’
Amount
50
12.5
62.5
Units
125
Rs. ‘000’
Amount
216
125
216
(2.5M)
Rs. ‘000’
Units
b/d
Amount
2,500
Units
4,212 Output – Beta
Amount
9,000
15,534
625
62.5
(2,713+1,499)
Input
10,000
Normal Loss
(2,500+10,000) × 5%
Material
(625
100)
x
10,000
Conversion
5,760 c/d
Ab. Gain (balance)
125
216
12,625
20,187
3,000
4,583
12,625
20,180
Cost Allocation:
Output
=
9,000 × 1.726
=
15,534
c/d WIP
=
(3,000 × 1.065) + (2,100 × 0.661)
=
4,583
Ab. Gain
=
125 × 1.726
=
216
Calculation of normal loss (inspection stage is 60%)
Opening
2500
100 % M
30% C
Input
10,000
100%M
100%C
Closing
3000
100%M
70%C
Expected loss : (2,500+10,000)x5%=625
Page 5 of 35
Ans 2:
a) Equivalent Units:[FIFO]
(3M)
Process Y
Output
2,500
Material
Conversion
-
-
625 (25%)
17,500
17,500
17,500
Ab. Loss 1,565
1,565
1,565
1096 (70%)
c/d WIP 2,000
2,000
2,000
1,100 (55%)
21,065
21,065
20,321
20,000
17,500
Cost Per Unit:
Process Y
=
Material
=
Conversion
=
36,000 − 112
21,065
20,000
21,065
22,000
20,321
=
1.70 / unit
0.95 / unit
=
1.08 / unit
=
3.73
unit
Total
b) Cost Allocation:
(3M)
Output
=
4,000 + (625 × 1.08) + (17,500 × 3.73)
=
69,950
Ab. Gain
=
(1,565 × 1.70) + (1,565 × 0.95) + (1,096 × 1.08)
=
5,331
Closing WIP
=
(2,000 × 1.70) + (2,000 × 0.95) + (1,100 × 1.08)
=
6,488
(c)
(4M)
Accounting entries of recording gain or loss for the month:
(i)
Normal loss
Process – Z
(ii)
Cash
Normal loss
(iii)
Abnormal loss
Process – Z
(iv)
Cash
Abnormal loss
112
112
112
112
5,331
5,331
122
122
Workings
Process – Z
Normal Loss
Units
Amount
1,435
112 Cash
1,435
112
Units
1,435
1,435
Rs. ‘000’
Amount
112
112
Page 6 of 35
Indeed, the death from which you Flee, Indeed it will meet you [62:8]
Abnormal Loss
Units
Amount
1,565
5,331 Cash (1,565 x 78)
Profit and Loss (bal)
1,565
5,331
Process – Z
Process - Z for the month of October, 2018
(3M)
Process A/c – Z
Units
Amount
b/d WIP
2,500
4,000 Finished goods Output
Process Y
15,000
36,000 N. Loss (W-1)
(1,435 × 78)
Material
7,500
20,000 Abnormal loss (Bal.)
Conversion
22,000
c/d WIP
25,000
82,000
Calculation of Normal loss:
Opening WIP
2,500
Input (15,000+7,500)
22,500
Closing WIP
2,000
Inspection Stage
(22,500-2,000) x 7%
1,565
Rs. ‘000’
Amount
122
5,209
5,331
Units
20,000
1,435
Rs. ‘000’
Amount
69,950
112
1,565
5,331
2,000
25,000
16,488
81,881
Units
1,565
(2M)
(100% Material , 75% conversion)
Already tested
(100% Material , 55% conversion)
Will be tested in next period
(100% Material , 70% conversion)
=1,435
Note:
As the question is silent and it is not possible to solve the question by using Weighted Average method
(Because breakup amount of opening WIP is not available) therefore use FIFO.
Page 7 of 35
Test joint and by product and variance
Q.1
Cricket Chemicals Limited (CCL) is a manufacturing concern and has two production
processes. Process I produces two joint products i.e. X-1 and X-2. Incidental to the production of
joint products, it produces a by-product known as Zee. X-1 is further processed in process II and
converted into ‘X1-Plus’.
Following information has been extracted from the budget for the year ending 31 August 2019:
(ii)
Process wise budgeted cost:
Process I
Process II
--------------Rupees -----------Direct material (500,000 liters)
98,750,000
Conversion cost
72,610,000
19,100,000
(iii)
Expected output ratio from process I and budgeted selling prices:
Products
Joint product – X-1
Joint product – X-2
By-product – Zee
X1-Plus
Output ratio
in process I
55%
40%
5%
Selling price
(Rs. per liter)
532
120
-
768
Additional information:
(vi)
Material is added at the beginning of the process and CCL uses 'weighted average method'
for inventory valuation.
(vii)
Joint costs are allocated on the basis of net realizable value of the joint products at the splitoff point. Proceeds from the sale of by-product are treated as reduction in joint costs.
(viii) Joint product X-2 is sold after incurring packing cost of Rs. 75 per liter.
(ix)
Normal production loss in process I is estimated at 5% of the input which occurs at
beginning of the process. Loss of each liter results in a solid waste of 0.7 kg which is sold for
Rs. 10 per kg. No loss occurs during process II.
(x)
Budgeted conversion cost of process I and process II include fixed factory overheads
amounting to Rs. 7,261,000 and Rs. 3,820,000 respectively.
Required:
(d)
Prepare product wise budgeted income statement for the year ending 31 August 2019, under
absorption costing.
(8)
(e)
Prepare product wise budgeted income statement for the year ending 31 August 2019, under
marginal costing.
(7)
Page 8 of 35
Death is the destroyer of all worldly pleasures.
Question: 2
Safety Products (Pvt) Limited (SPL) is engaged in the manufacturing of safety products for the
construction industry. The following production information, for further analysis, has been provided by
SPL:
Rupees
Per unit Budgeted Cost:
Direct material (10 kg @ Rs. 22 per kg)
220
Direct labour (1.5 hours @ Rs. 110 per hour)
165
Variable overhead (1.5 hours @ Rs. 55 per hour)
82.5
Fixed overhead (1.5 hours @ Rs. 110 per hour)
165
Total per unit budgeted cost
632.5
Budgeted variable overhead
866,250
Budgeted fixed overhead
1,732,500
Fixed and variable overheads are absorbed on the basis of direct labour hours, which are estimated to
be 15,750 hours per month.
Rupees
Actual cost results:
Direct material (100,000 kg)
1,650,000
Direct labour (13,000 hours)
1,573,000
Variable overhead
910,000
Fixed overhead
1,692,900
Total actual cost
5,825,900
Budgeted sales of SPL is 10,500 units at a price of Rs. 1,210 per unit and the actual sales revenue of the
company is Rs. 12,540,000 for 9,500 units.
Required:
a) Calculate the following variances:
i.
Sales price variance
ii.
Sales volume profit variance
iii.
Material price variance
iv.
Materials usage variance
v.
Labour rate variance
vi.
Labour efficiency variance
vii.
Variable overhead expenditure variance
viii.
Variable overhead efficiency variance
b) Calculate the following fixed overhead variances:
i.
Fixed overhead expenditure variance
ii.
Fixed overhead volume variance
iii.
Fixed overhead volume efficiency variance
iv.
Fixed overhead volume capacity variance
(1.5 x 08 =12)
(1.5 x 4 = 08)
Page 9 of 35
Question:3
Choc Co is a company which manufactures and sell three types of biscuits in packets. One of them is
called ‘Ooze’ and contains three types of sweeteners: honey, sugar and syrup. The standard materials
usage and cost for one unit of ‘Ooze’ (one packet) is as follows:
Honey
Sugar
Syrup
20 grams at 0.02 per gram
15 grams at 0.03 per gram
10 grams at 0.025 per gram
0.40
0.45
0.25
1.10
In the three months ended 30 November 2011, Cho Co produced 101,000 units of ‘Ooze’ using 2,200 kg
of honey, 1,400 kg of sugar and 1,050 kg of syrup.
Note: there are 1,000 grams in a kilogram (kg).
Required:
Calculate the following variance for materials in Ooze:
i.
Total materials usage variance.
ii.
Total materials mix variance.
iii.
Total materials quantity (yield) variance.
(4 marks)
(4 marks)
(4 marks)
Question: 4
Titan Manufacturing Company produces a consumer product. The company prepares its fixed
production budget annually and standard costing for the production budget annually and standard
costing for the production on monthly basis. The budget, the standard production cost and actual data
for the month ended June 30, 2016 are given below:
Budgeted and Standard Cost Data
Budgeted sales and production for the month (Units)
25,000
Standard cost for each unit of product:
Direct material:
Beta
15 kgs @ Rs. 2 per kg
Gama
10 kgs @ Rs. 7 per kg
Direct labour incurred
10 hours @ Rs. 4 per hour
Fixed production overhead
200% of direct labour
Budgeted sales price has been calculated to give a profit of 20% on sales price.
Actual Data for the Month
Production (units sold at a price 20% higher than budgeted)
Direct material consumed:
Beta
Gama
Direct labour incurred
Fixed production overheads incurred (Rs.)
Other information:
Volume efficiency variance (Rs.)
Volume capacity variance (Rs.)
14,500
150,000 kgs @ Rs. 3 per kg
75,000 kgs @ Rs. 6 per kg
72,000 hours at Rs. 5 per hour
1,800,000
584,000 (F)
1,424,000 (A)
Required:
a) Prepare a statement for month ended June 30, 2016 showing:
i.
The standard production cost and selling price per unit.
ii.
The actual profit for the period.
b) Determine the variance for:
i.
Direct material price and usage.
ii.
Direct labour rate and efficiency.
iii.
Fixed overhead expenditure and volume.
(03)
(03)
(03)
(03)
(02)
Page 10 of 35
Our train is heading towards death, and we are worried about life.
iv.
Sales price and volume.
c) Reconcile the budgeted and actual profit.
(02)
(04)
Ans. 1 (a)
Cricket Chemicals Limited
Product wise budgeted income statement (Absorption costing)
for year ended 31-8-2019
Sales
COS:
Cost
of
manufactured
goods
X1 Plus
200,640
X2
101,080
(132,971)
(68,714)
(113,871+19,100)
67,669
Gross profit
Rs.000
Total
301,720
(201,685)
(54,464 + 14,250)
32,366
100,035
Workings:
19,100
(475,000 x 55%)
X1 [26,125] (55%)
X2 [190,000] (40%)
500,000
ll
X1 Plus [261,250]
(55%)
Packing Cost 75/L
Zee [23,750] (5%) (23,750 x 120) = 2,850
N. Loss [25,000 L] (25,000 x0.7 x10) = 175
D.M
Conversion
Zee
N. Loss
98,750
72,610
(2,850)
(175)
168,335
Allocation:
Rs. ‘000’
Units
X1 plus
X2
261,250
190,000
Sale price /
unit
768
532
Sale Value
200,640
101,080
Further
processing
19,100
14,250
(190,000x75)
NRV
Allocation
181,540
86,830
113,871
54,464
268,370
168,335
Page 11 of 35
(b)
Cricket Chemicals Limited
Product wise budgeted income statement (marginal costing)
for year ended 31-8-2019
X1 Plus
200,640
Sales
Variable COS:
Variable Production Cost
Net Contribution
Fixed Cost (7,261 + 3,820)
Net profit
Rs.000
X2
101,080
(124,971)
109,691 + 15,280
75,669
Total
301,720
(65,633)
51,383 + 14,250
35,447
(190,604)
111,116
(11,081)
100,035
Workings:
(475,000 x 55%)
(19,100 - 3,820 = 15,280)
X1 [26,125] (55%)
X2 [190,000] (40%)
500,000
ll
X1 Plus [261,250]
(55%)
Packing Cost 75/L
Zee [23,750] (5%) (23,750 x 120) = 2,850
N. Loss [25,000 L] (25,000 x0.7 x10) = 175
D.M
98,750
Conversion 72,610
Zee
(2,850)
N. Loss
(175)
Fixed Cost (7,261)
161,074
Allocation:
Rs. ‘000’
Units
X1 plus
X2
261,250
190,000
Sale price /
unit
768
532
Sale Value
200,640
101,080
Further
processing
15,280
14,250
(190,000x75)
NRV
Allocation
185,360
86,830
109,691
51,383
272,190
161,074
Page 12 of 35
Death may not come to us today but we are one day closer to it.
Ans 2. Calculation of Variances:
Sales
Price
(BR – AR) × AQS
[1210 -
Volume
(BQS – AQS) × Std. profit / unit
[(10,500 – 9500)x 577.5 (1210-632.5)
12,540,000
] x 9500
9,500
1,045,000 F
577,500 A
Material
Price
(SR – AR) × AQU
[22 -
Usage
(SQU – AQU) × S.R
[(9.500 x 10)-100,000]x22
1,650,000
] x 100,000)
100,000
550,000 F
110,000 A
Labour
Rate
(SR – AR) × AHW
[110 -
Efficiency
(SHW – AHW) × S.R
[(9500 × 1.5) – 13,000] × 110
1,573,,000
] x 13,000
13,000
143,000 A
137,500 F
Variable OH
Rate
(SR – AR) × AHW
[55 -
910,000
] x 13,000
13,,000
195,000 A
Efficiency
(SHW – AHW) × S. R
[(9500× 1.5) –13,000] × 55
68,750 F
(b) Calculation of Fixed Overhead Variances:
(1)Fixed Overhead expenditure variance:
Budgeted expenditure
Actual expenditure
1,732,500
1,692,900
39,600
F
1,732,500
1,567,500
165,000
A
1,567,500
1,430,000
137,500
F
(2)Fixed Overhead volume variance:
Budgeted F-OH (10,500x165)
Applied F-OH (9500x165)
(3) Fixed Overhead volume Efficiency variance:
Std hrs for AP (9500x1.5x110)
Actual consumed (13,000x110)
Page 13 of 35
(4) Fixed Overhead volume capacity variance:
Budgeted hrs (10,500x1.5 x110)
Actual hrs (13,000x110)
1,732,500
1,430,000
302,500
A
Answer:3
H
S
S
SQU in SM for A.P
2,020 (110,000*0.02)
1,515 (101,000*0.010)
1,010 (101,000*0.010)
4,545
AQU in SM for A.P
2,067 (4,650*20/45)
1,550 (4,650*15/45)
1,033 (4,650*10/25)
4,650
Usage variance:
H
(2,020 – 2,200) x 20
S
(1,515 – 1,400) x 30
S
(1,010 – 1,050) x 25
=
=
=
3,600 A
3,450 F
1,000 A
1,150 A
Mix variance:
H
(2,067 – 2,200) x 20
H
(1,515 – 1,400) x 30
S
(1,033 – 1,050) x 25
=
=
=
2,660 A
4,500 F
425 A
1,415 F
Yield variance:
H
(2,020 – 2,067) x 20
S
(1,515 – 1,550) x 30
S
(1,010 – 1,033) x 25
=
=
=
940 A
1,050 A
575 A
2,565 A
AQU in AM for A.P
2,200
1,400
1,050
4,650
Answer: 4
(a)
Operating Statement for the month ended June 30, 2016.
(i) Calculation of standard Product cost and selling price/unit:
Rs. /unit
Direct Material:
Beta
Gama
Direct Labour:
(15 Kg @ rs. 2)
(10 Kg @ Rs.7)
(10 hours @ Rs. 4)
Fixed production overhead (Rs. 40 x 200%)
Standard Cost:
Profit (220 x 20/80)
Budgeted sale Price
30
70
40
80
220
55
275
(ii) Calculation of Actual Profit for the period:
Sales (275 x 120% = 330 x 14,500 units)
Direct Material:
Beta
(150,000 Kg @ Rs. 3)
Gama
(75,000 Kg @ Rs. 6)
Rs. 000
4,785
450
450
Page 14 of 35
AND WORSHIP YOUR LORD UNTIL THERE COMES INTO YOU THE CERTAINITY (I.E DEATH). [15:99]
Direct Labour
(72,000 @ Rs. 5)
Fixed production overhead
Total
Actual Profit
(b) Variances:
Price Variance:
Beta
Gamma
150,000 kgs. (Rs. 2 - @ Rs.3)
75,000 kgs. (Rs. 7 - @ Rs. 6)
Usage Variance:
Beta
Gamma
Rs. 2 (14,500 units x 15 kg – 150,000)
Rs. 7 (14,500 units x 10kg – 75,000)
(ii) Direct labour rate and efficiency variances:
Rate variance
72,000 hrs. (Rs. 4 – Rs. 5)
Efficiency Variance
Rs:4 (14,500 units x 10 Hrs – 72,000)
(iii)
Fixed overhead variance:
Expenditure variance
(25,000 units x Rs 80 – 1,800,000)
Volume Variance:
Volume efficiency variance (Given)
Volume capacity variance (Given)
(iv)
Sales variance:
Price variance
14,500 units x (Rs. 330 – Rs 275)
Volume variance
(14,500 units – 25,000 units) x Rs. 55
(c) Reconciliation
Budgeted profit (25,000 x 55)
Material variance (625 – 75)
Labour variance (292 – 72)
FOH variance (200 – 840)
Sales variance (797.5 – 577.5)
Actual profit
360
1,800
(3,060
1,725
(150) A
75 F
(75) A
135 F
490 F
625
(72) A
292 F
220 F
200 F
584 F
(1,424) A
(640) A
797.5 F
577.5 A
220 F
1,375
550 F
220 F
(640) A
220 F
1,725
Page 15 of 35
Extra questions
Q.1
Tulip Enterprises (TE) manufactures a product Alpha that requires two separate processes, A
and B. Following information has been extracted from the cost records of Process B for the month of
February 2019:
Quantity
Opening work-in-process – Process B
(80% complete as to conversion)
Cost for the month:
- Received from process A
- Added during process B
Closing work-in-process – Process B
(70% complete as to conversion)
Liters
10,000
90,000
12,000
9,500
Process A
Process B cost
cost
Material Conversion
------------- Rs. in '000 ------------1,500
600
400
14,000
-
7,000
-
5,600
-
Additional information:
(iii)
(iv)
(v)
(vi)
Materials are added at start of the process.
Normal loss is estimated at 5% of the inspected units and loss is determined at
completion of the process. Loss of each liter results in a solid waste of 0.75 kg.
During the month of February 2019, solid waste produced was 6,000 kg.
Solid waste is sold for Rs. 170 per kg after incurring further cost of Rs. 20 per kg.
TE uses weighted average method for valuation of inventory.
Required:
Prepare accounting entries to record the transactions of process B.
(Narrations to accounting entries are not required)
(12)
Q.2 Daisy Limited (DL) manufactures and markets product Zee. DL uses standard absorption
costing. Following information pertains to product Zee for the month of February 2019.
(a)
Data extracted from the budget for the month of February 2019:
Production
Units
Cost of production:
Direct material
Rs. in '000
X: 16,000 kg @ Rs. 400 per kg
Y: 14,000 kg @ Rs. 300 per kg
10,000 hours @ Rs. 220 per hour
Direct labour
Factory overheads
(including fixed overheads of Rs. 900,000) Rs. 250 per labour hour
(i)
(ii)
(iii)
(iv)
(v)
27,000
6,400
4,200
2,200
2,500
Actual input ratio of X and Y was 55:45 respectively.
Direct materials are added at the beginning of the process. Actual process losses
were 6% of the output. There is no change in the direct material prices during the
month.
DL increased wages by 12% as against the budgeted increase of 8% which improved
labour efficiency by 5%.
Due to higher than expected inflation, actual factory overhead rate was 6% higher
than the budgeted rate.
Conversion costs were incurred evenly throughout the process.
Page 16 of 35
No one besides ALLAH can rescue a soul from hardship.
(vi)
27,400 units of Zee were transferred to finished goods. There was no opening or
closing work in process. Finished goods inventory at the beginning and closing of
the month was 1,000 units and 1,500 units respectively.
Required:
Compute the following:
(a)
(b)
(ii)
Material price, mix and yield variances
Labour rate and efficiency variances
Over/under applied overheads and analyse it into:
(iii) variable overhead expenditure and efficiency variances
(ii) fixed overhead expenditure and volume variances
(06)
(04)
(06)
Q.3 Hexa Limited is using a standard absorption costing system to monitor its costs. The management is
considering to adopt a marginal costing system. In this respect, following information has been
extracted from the records for the month of December 2016:
(i) Actual as well as budgeted sale was 10,500 units at Rs. 2,000 per unit.
(ii) Standard cost per unit is as follows:
Direct material
Direct labour
Production overheads (fixed & variable)
(iii)
(iv)
5 kg @ Rs. 158
3 hours @ Rs. 150
Rs. 120 per labour hour
Rupees
790
450
360
1,600
Budgeted fixed overheads were Rs. 1,650,000.
Production and actual costs were as under:
Production: Budgeted
Actual
Actual variable costs:
Direct material (58,000 kg @ Rs. 160)
Direct labour (35,000 hours @ Rs. 155)
Variable overheads
Units
11,000
12,000
Rupees
9,280,000
5,425,000
2,975,000
(v) Applied fixed overheads exceeded actual overheads by Rs. 200,000.
(vi) There was no opening finished goods inventory. Actual Closing finished goods inventory was
1,500 units. Measure the actual closing finished goods inventory at the standard variable
production cost.
Required:
(a)
Compute the budgeted and actual profit for the month of December 2016, using standard
marginal costing.
(8)
(b)
Reconcile the above profit by incorporating the related variances.
(8)
Q.4
Cricket Chemicals Limited (CCL) is a manufacturing concern and has two production
processes. Process I produces two joint products i.e. X-1 and X-2. Incidental to the production of
joint products, it produces a by-product known as Zee. X-1 is further processed in process II and
converted into ‘X1-Plus’.
Following information has been extracted from the budget for the year ending 31 August 2019:
Page 17 of 35
Process wise budgeted cost:
Direct material (500,000 liters)
Conversion cost
Process I
Process II
--------------Rupees -----------98,750,000
72,610,000
19,100,000
Expected output ratio from process I and budgeted selling prices:
Products
Joint product – X-1
Joint product – X-2
By-product – Zee
X1-Plus
Output ratio
in process I
55%
40%
5%
Selling price
(Rs. per liter)
532
120
-
768
Additional information:
1. Material is added at the beginning of the process and CCL uses 'weighted average method'
for inventory valuation.
2. Joint costs are allocated on the basis of net realizable value of the joint products at the splitoff point. Proceeds from the sale of by-product are treated as reduction in joint costs.
3. Joint product X-2 is sold after incurring packing cost of Rs. 75 per liter.
4. Normal production loss in process I is estimated at 5% of the input which occurs at
beginning of the process. Loss of each liter results in a solid waste of 0.7 kg which is sold for
Rs. 10 per kg. No loss occurs during process II.
5. Budgeted conversion cost of process I and process II include fixed factory overheads
amounting to Rs. 7,261,000 and Rs. 3,820,000 respectively.
Required:
(a)
Prepare product wise budgeted income statement for the year ending 31 August 2019, under
marginal costing.
(14)
(b)
CCL has recently received an offer from Football Industries Limited (FIL) to purchase the
entire expected output of X-1 during the year ending 31 August 2019 at Rs. 670 per liter. It is
estimated that if process II is not carried out, fixed costs associated with it would reduce by
Rs. 2,500,000. Advise whether FIL’s offer may be accepted.
(02)
Answer 1:
Tulip Enterprises
Accounting entries for Process B:
WIP-B
26,600
WIP-A
Raw material
Conversion
Finished Goods
14,000
7,000
5,600
25,326
WIP-B
Normal Loss
25,326
577
WIP-B
577
Page 18 of 35
My ALLAH has always been kind to me.
Abnormal Loss
771
WIP-B
771
WIP
Cash
2,875
Abnormal Loss
771
Cash
43,125
P/L (BAL.)
2,875
367
447
2,875 x 0.75 x 20 = 43.125
Abnormal Loss
43.125
Cash
43.125
2,875 x 0.75 x 170 = 367
Cash
367
Ab. Loss
P/L
447
Ab. Loss
367
447
Workings:
b/d [1,500 + 600+ 600]
Process A
Material
Litres
10,000
90,000
12,000
Conversion
Calculation of Normal Loss:
Opening WIP (100% M; 80% C.C)
Input for the month (90,000 + 12,000)
Closing WIP (100% M; 70% C.C)
Inspection Stage (100% M; 100% C.C)
[10,000 + 102,000 – 9,500] x 5%
Process-B
Amount
2,500
Finished Goods (Bal.)
14,000
Normal Loss (Working)
7,000
Abnormal Loss
(6,000 / 75 – 5,125)
5,600
c/d
Rs. ‘000’
Litres
94,500
5,125
2,875
Amount
25,326
577
771
9,500
2,381
10,000
102,000
9,500
= 5,125 litres
Recovery value of Normal Loss:
[5,125 x 0.75 x 150 (170 - 120)] = 577
Page 19 of 35
Equivalent Production Units:
Finished Goods
Ab.Loss
C/d WIP
94,500
2,875
9,500
Process A
94,500
2,875
9,500
106,875
Cost/unit:
Process – A: 1,500 + 14,000 – 577 / 106,875
Material:
600 + 7,000 / 106,875
Conversion:
400 + 5,600 / 104,025
=
=
=
Material
94,500
2,875
9,500(100%)
106,875
Conversion
94,500
2,875
6,650 (70%)
104,025
0.14
0.07
0.058
0.268
Cost Allocation:
Finished Goods = 94,500 x 0.268 = 25,326
Ab.Loss
=2,875 x 0.268 =771
C/D WIP
=9,500 X 0.14 +
9,500 X 0.07 +
6,650 X 0.058 = 2,381
Answer 2:
a)
Material Price, Mix and Yield Variances:
i.
Material Price Variance: no variance as there is no change in prices of material.
ii.
Material Yield Variances:
X [16,237 – 15,490] x 400 = 298,800 F
Y [14,207 – 13,554] X 300 = 195,900 F
494,700 F
iii.
Material Mix Variances:
X [15,490 – 15,974] x 400 = 193,600 A
Y [13,554 – 13,070] X 300 = 145,200 F
48,400 A
Workings:
SQU in SM for A.P
16,237
(16,000 / 27,000 X 27,400)
14,207
(14,000 / 27,000 X 27,400)
30,444
X
Y
AQU in SM for A.P
15,490
(29,044 X 16,000 / 30,000)
13,554
(29,044 X 14,000 / 30,000)
29,044
AQU in AM for A.P
15,974
(55%)
13,070
(45%)
29,044 (W-1)
(W-1)Calculation of actual quantity used for actual production
27,400 / 100 X 106 = 29,044
106
100
6
Page 20 of 35
Loneliness is better than a bad company.
b) Labor rate variance:
(SR - AR) X AHW for A.P
(220 – 228.15*) X 9,641** = 78,574 A
*(220 / 108 x 112) = 228.15
**(10,000 / 27,000 x 27,400 x 95%) = 9,641
Labor Efficiency variance:
(SHW for A.P - AHW) X S.R
[(27,400 X 10,000 / 27,000) – 9,641] X 220
[(10,148 – 9,641)] X 220 = 111,540 F
c)
Under / over absorbed Factory overheads:
Actual overheads:
Variable OH : [9,641 X 160* X 1.06]
Fixed OH : [900,000 X 1.06]
Applied OH:
Actual Production x Std OH rate/ unit
[27,400 x (2,500,000 / 27,000)]
Overheads under applied
=1,635,114
=954,000
2,589,114
=2,537,037
= 52,077 A
*Standard Fixed OH rate / hour [900,000 / 10,000] = 90/hr
*Standard variable OH rate / hour [250 – 90]
= 160/hr
Analysis of under applied overheads:
i.
Variable OH expenditure variance:
(SR – AR) X AHW for A.P
[160 – (160 X 1.06)] X 9,641 = 92,554 A
Variable OH Efficiency variance:
[SHW for A.P - AHW] X S.R
[(27,400 X 10,000 / 27,000) – 9,641] X 160
(10,148 – 9,641) X 160
= 81,144 F
ii.
Fixed OH expenditure variance:
Budgeted Fixed OH
Actual Fixed OH (900,000 X 1.06)
Fixed OH volume variance:
Budgeted Fixed OH (27,000 x 33.33)
Applied Fixed OH (27,400 x 33.33*)
900,000
954,000
54,000 A
900,000
913,333
13,333F
*[900,000 / 27,000] = 33.33/unit
Page 21 of 35
A.3 Hexa Limited
(i) Budgeted profit for the month of December 2016 (Marginal costing)
Sales [10,500 x 2,000]
Variable cost of sales:
Opening stock
+ Variable COGM:
Direct Material [11,000 x 790]
Direct Labour [11,000 x 450]
Variable – OH [11,000 x 210*]
Closing stock [500 x (790 + 450 +210)]
Gross contribution
Fixed cost
Net profit
*Standard OH rate
Less : Standard fixed OH rate [1,650,000 ÷ 11,000)
Standard Variable OH rate
21,000,000
8,690,000
4,950,000
2,310,000
15,950,000
(725,000)
(15,225,000)
5,775,000
(1,650,000)
4,125,000
Per Unit
360
(150)
210
Per Hour
120
(360 ÷ 3)
(50)
(150 ÷ 3)
70
ii) Actual profit for the month of December 2016 (Marginal costing)
Sales [10,500 x 2,000]
Variable cost of sales:
Opening stock
+ Variable COGM: (12,000 units)
Direct Material
Direct Labour
Variable – OH
Closing stock [1500 x (790 + 450 +210)]
Gross contribution
Fixed cost*
Net profit
21,000,000
9,280,000
5,425,000
2,975,000
17,680,000
(2,175,000)
(15,505,000)
5,495,000
(1,600,000)
3,895,000
*Applied Fixed OH [12,000 x 150]
= 1,800,000
Actual Fixed OH
= 1,600,000
Over applied Fixed OH
200,000F
Page 22 of 35
And never say of anything, “I shall do such and such thing tomorrow” except (with the saying) if ALLAH wills!”
(b) Reconciliation Of Budgeted Profit With Actual Profit
Budgeted profit
Budgeted fixed cost
Budgeted contribution
Variances:
Material price
Material usage
Labor rate
Labor efficiency
Variable overhead expenditure
Variable overhead efficiency
Actual Contribution:
Budgeted fixed cost
1,650,000
Fixed OH Expenditure Var.
50,000 F
Actual Profit
4,125,000
1,650,000
5,775,000
116,000A
316,000F
175,000A
150,000F
525,000A
70,000F
5,495,000
(1,600,000)
3,895,000 Working:
Calculation of Variances:
Sales
Price
(BR – AR) × AQS
(2,000 - 2,000) × 10,500
Volume
(BQS – AQS) × Std.cont/unit
[(10,500 - 10,500) x 550 [2,000-790-450210]
NIL
NIL
Material
Price
(SR – AR) × AQU
(158 ̶ 160) x 58,000
116,000 A
Usage
(SQU – AQU) × S.R
[(12,000 x 5)-58,000]x158
316,000 F
Labour
Rate
(SR – AR) × AHW
(150 – 155) × 35,000
175,000 A
Efficiency
(SHW – AHW) × S.R
[(12,000 × 3) – 35,000] × 150
150,000 F
Variable OH
Expenditure
(SR – AR) × AHW
2,975,000
[70 ] x 35,000
Efficiency
(SHW – AHW) × S. R
[(12,000 × 3) –35,000] × 70
525,000 A
70,000 F
35,000
Page 23 of 35
Fixed OH
Expenditure
Budgeted Fixed OH
Actual Fixed OH
1,650,000
1,600,000
50,000 F
Ans. 4 (a):
Cricket Chemicals Limited
Product wise budgeted income statement (marginal costing)
for year ended 31-8-2019
Sales
Variable COS:
Variable Production Cost
Net Contribution
Fixed Cost (7,261 + 3,820)
Net profit
X1 Plus
200,640
(124,971)
109,691 + 15,280
75,669
Rs.000
X2
101,080
Total
301,720
(65,633)
51,383 + 14,250
35,447
(190,604)
111,116
(11,081)
100,035
Workings:
(475,000 x 55%)
(19,100 - 3,820 = 15,280)
X1 [26,125] (55%)
X2 [190,000] (40%)
500,000
ll
X1 Plus [261,250]
(55%)
Packing Cost 75/L
Zee [23,750] (5%) (23,750 x 120) = 2,850
N. Loss [25,000 L] (25,000 x0.7 x10) = 175
D.M
98,750
Conversion
72,610
Zee
(2,850)
N. Loss
(175)
Fixed Cost
(7,261)
161,074
Allocation:
Units
X1 plus
X2
261,250
190,000
Sale price /
unit
768
532
Sale Value
200,640
101,080
Rs. ‘000’
Further
processing
15,280
14,250
(190,000x75)
NRV
Allocation
185,360
86,830
109,691
51,383
272,190
161,074
Page 24 of 35
ALWAYS REMEMBER, Allah is watching us anytime, anywhere.
b) Evaluation of offer from FIL
Rs. in million
(25.60)
15.28
2.50
(7.82)
Loss of revenue if offer is accepted [261,250 x (768 -670)
Variable cost saved in process – II (19.10 m – 3.82 m)
Fixed cost saved
(Decrease)/Increase in budgeted profits
Conclusion:
Offer should not be accepted.
Test decision making and CVP
Q.1 Sarwar Limited (SL) manufactures two industrial products i.e. K2 and K9. It also
manufactures other products in accordance with the specification of customers. SL’s
products require specialised skilled labour. Maximum labour hours available with the
company are 300,000 per month.
Following information has been extracted from SL’s budget:
Selling price
Direct material
Direct labour (Rs. 300 per hour)
Variable production overheads (based on labour hours)
Applied fixed production overheads (based on labour hours)
Monthly demand (Units)
K2
K9
---- Rs. per unit ---16,500
26,000
6,000
8,000
4,500
7,500
1,875
3,125
1,500
2,500
5,000
8,000
An overseas customer has offered to purchase 3,000 units of a customized industrial
product ‘A-1’ at a price of Rs. 35,000 each. The duration of contract would be one
month. The cost department has ascertained the following facts in respect of the
contract:
1. Each unit of A-1 would require 3 units of raw material B-1 and 2 units of raw material
C-3. B-1 is available in the local market at Rs. 2,500 per unit. However, the required
quantity of C-3 is not available in the local market and would be imported from
Srilanka at a landed cost of Rs. 2.4 million.
2. Each unit of A-1 would require 35 labour hours.
3. A specialised machinery would be hired for five days. However, due to certain
production scheduling issues, it is difficult for SL to exactly predict when the machine
would be required. As a result of negotiations, SL has received the following offers:
Falah Modarba has quoted a rent of Rs. 0.9 million for the entire month. If accepted, SL
would be able to sublet the machine at Rs. 20,000 per day.
Tech Rentals has quoted a rent of Rs. 57,000 per day and guaranteed availability of
machinery when required.
The management believes that it can increase/decrease the production of K2 and K9, if
required.
Required:
Determine the maximum profit that can be earned by SL, in the above situation.
(10)
Page 25 of 35
Q.2 Lily (Private) Limited (LPL) has two factories. LPL manufactures a product Delta in its Quetta
factory. One unit of Delta is assembled from three components P, Q and R which are produced
in the Hub factory. Monthly demand of Delta is estimated at 5,000 units.
Following information is available in respect of each component:
P
Q
R
2
2
3
4
3
5
--------- Rupees ------
Quantity required for one unit of Delta
Machine hours required for producing each component
Cost of production:
▪
▪
▪
▪
Direct material
Direct labour
Factory overheads
Allocated administrative overheads
900
270
500
40
800
250
700
30
300
240
280
50
Fixed factory overheads are charged at Rs. 20 per machine hour.
Production capacity at Hub factory is restricted to 100,000 machine hours per month. In order
to meet the demand, LPL is considering to purchase P, Q and R from a vendor at Rs. 1,700, Rs.
1,800 and Rs. 870 per unit respectively.
Required:
Determine how LPL can optimise its profit in the above situation. (11)
Q.3 Snooker (Private) Limited (SNPL) manufactures a component ‘Beta’ which is used as input
for many products. The current requirement of Beta is 18,000 units per annum. Current
production cost of Beta is as follows:
Direct material
Direct labour
Variable manufacturing overheads
Fixed manufacturing overheads
Total cost
Rs. per unit
3,670
1,040
770
870
6,350
A supplier has recently offered SNPL to supply Beta at Rs. 7,000 per unit. The management has
nominated a team to evaluate the offer which has gathered the following information:
1. There is a shortage of labour. However, some of the labour would become available due
to outsourcing of Beta, which would be utilized for production of a product ‘Zee’. The
estimated selling price of Zee is Rs. 5,800 per unit whereas production cost would be as
follows:
i. Direct material would cost Rs. 2,600 per unit.
ii. Each unit of Zee would require 20% more labour as compared to each
unit of Beta. Estimated variable manufacturing overheads would be Rs.
480 per unit.
2. Outsourcing of Beta and production of Zee would result in net reduction in fixed
manufacturing overheads by Rs. 1,900,000 per annum.
Required:
Advise SNPL whether it should outsource component Beta or not.
(09)
Page 26 of 35
ALLAH has heard the yearning of your quiet heart. Be patient, everything will be ok soon.
Q.4 Following information has been extracted from the projected results of Saffron Limited (SL) for the
year ending 31 March 2019:
Sales
Rs. 160 million
Contribution margin
30%
Margin of safety
25%
Information for the next year ending 31 March 2020:
i.
SL is planning to increase its sales by reducing sales prices by 5% and launching
a sales campaign at a cost of Rs. 5 million.
ii.
Cost efficiency measures planned for the next year are expected to reduce
variable cost per unit by 10%.
iii. Inflation impact on all costs would be 8%, except depreciation. At present,
depreciation is 40% of the total fixed cost.
iv. Margin of safety would be maintained at 25%.
Required:
1. A budgeted statement of profit or loss for the year ending 31 March 2020 based on the above
projections.
(8)
2. Calculate the percentage increase in sales volume
(2)
Page 27 of 35
Ans.1 Sarwar Limited
K2
K9
A-1
-------------------- Rs. per unit -------------------Given
16,500.00
26,000.00
35,000.00
12,375.00
18,625.00
23,270.00
Selling price
Variable cost
(6,000+4,500+1,875)
Contribution per unit
A
Labour hours required per unit
B
CM per labour hour (Rs.)
A/B
Ranking
Allocation of 300,000
hours
Units to be produced
C
C/B
4,125.00
(8,000+7,500+3,125)
7,375.00
(W-1)
11,730.00
15
25
35
(4,500/300)
(7,500/300)
Given
275.00
295.00
335.14
3
2
1
-
195,000
105,000
(300,000–105,000)
(35×3,000)
7,800.00
(195,000/25)
3,000.00
Contribution margin for the month after accepting special contract
Rs. in million
A-1
35.19
(3,000×11,730)
K-9
57.53
(7,800×7,375)
Contribution margin
92.72
Fixed cost
30.00
(1,500/15)×300,000
Maximum profit
62.72
W-1: Relevant cost for
A-1
Rs. per unit
Material cost - B1
7,500.00
(3×2,500)
Material cost - C3
800.00
(2,400,000/3,000)
Labour cost
10,500.00
(35×300)
Variable overheads
4,375.00
[{1875÷(4,500÷300)}×35]
Machine hire cost
95.00
[Lower of (57,000×5) and {900,000– (20,000×25)}]/3,000
Variable cost per unit of A-1
23,270.00
Workings:
Identification of limiting factor:
Available Hrs.
Required Hrs.:
K2 (5,000 x 15)
K9 (8,000 x 25)
A-1 (3,000 x 35)
Shortfall Hrs.
300,000
= 75,000
= 200,000
= 105,000
80,000
Page 28 of 35
We all prepare for Birthdays but what about Death day?
Answer: 2
Identification of limiting factor:
Available hours
Required hours:
For compound P
(2 x 4 x 5,000)
For compound Q
(2 x 3 x 5,000)
For compound R
(3 x 5 x 5,000)
=
100,000
=
40,000
=
30,000
=
75,000
Shortfall of hours
=
145,000
45,000
Relevant production cost:
P
Direct Material
Direct Labour
FOH
(500 – 20 x 4)
Total variable cost per component
Outstanding cost
Cost saving per component
Limiting factor (machine hours)
Cost saving per limiting factor
Priority in production
Q
R
900
270
420
800
250
640
300
240
180
1,590
1,700
110
4
27.5
3
1,690
1,800
110
3
36.67
1
720
870
150
5
30
2
Optimum production plan:
Available Hours
Units can be produced of Q
(5,000 x 2 x 3) Hrs. per component
Units can be produced of R
(4,667* x 3 x 5) Hrs. per component
*(X x 3 x 5 = 70,000)
X = 4,667
100,000
30,000
70,000
External purchases:
R = Total Required component – Produced component
= 15,000 (5,000 x 3)– 14,000 (4,667 x 3) = 1,000 components
P = 10,000 (5,000 x 2) components (All to be purchase)
Page 29 of 35
Answer: 3
Total saving by production of Beta:
Variable manufacturing cost/unit
(3,670 + 1,040 + 770)
Outsourcing cost/Unit
Saving production/Unit
Units required
Total saving by production
(18,000 x 1,520)
Total saving if ZEE is produced instead:
5,480
7,000
1,520
18,000
27,360,000
Variable manufacturing cost/unit
(2,600 + 1,040 x 1.2 + 480)
Selling price/unit
Contribution/unit
Units that can be produced
(18,000/1.2)
Total contribution that can be generated (15,000 x 1,472)
Saving in fixed cost
Total saving
Net saving if Beta is produced rather than being outsourced
(27,360,000 – 23,980,000)
4,328
5,800
1,472
15,000
22,080,000
1,900,000
23,980,000
3,380,000
Conclusion:
SNPL Should not outsourced the production of component X.
Answer: 4 (a)
Budgeted statement of profit or loss for the year ending 31 March 2020
Rs. in million
Sales
(Workings)
200.75
Variable cost
(200.75/100x71.62*)
(143.76)
*(if contribution sales ratio is 28.38% the variable cost is eequal to 100 – 28.38 =
71.62)
Contribution margin
56.97
Fixed cost
Net profit
Workings:
(W 2)
(42.73)
14.24
1.revised contribution margin in 2020:
Sales (160 x 90%)
Variable cost (160 x 70%) x 1.08 x 90%
Contribution margin
152
(108.86)
43.14
However question requires that margin of safety would be maintained at 25%. In addition,
fixed cost of 2020 (W 2) is also expected to change therefore breakeven sales would
change and from there we can find out final budgeted sales of 2020 by maintaining the
margin of safety at 25% as required in question.
Page 30 of 35
Count your blessings before you complain, there’s food on your plate, roof on your
head and millions wish to be on your place! Be grateful.
2.Fixed Cost in 2020
- For 2019
From margin of safety of 25%, we can find out breakeven sales of 2019. As we know that
at breakeven sales contribution is equal to fixed cost we can calculate it.
160/100 x 75 = 120 x 30% = 36
-
For 2020:
Depreciation
Other fixed cost
Sales compaign
(36×40%)
(36-14.40)×1.08
14.40
23.33
5.0
42.73
W 3) From this revised fixed cost and revised contribution margin ration, we can
calculate revised breakeven sales and therefore budgeted sales in 2020.
Fixed cost = 42.73
Contribution margin ratio = 28.38% (43.14/152 x 100)
Breakeven sales = 42.73/28.38% = 150.56
If margin of safety of 25% is to be maintained then:
Margin of safety = budgeted sales – breakeven sales
25 = 100 -75
Budgeted sales: 150.56/75 x 100 =200.75
(b) Increase in sales volume %
Increase in sales volume %:
Budgeted sales of 2020 at 2019 prices (200.75÷95x100)
211.32
Increase in sales volume (%)
32.07%
(211.32–160)÷160
Page 31 of 35
Extra question CVP
Q.1 Digital Industries Limited (DIL) incurred a loss for the year ended 30 June 2017 as it could
achieve sales amounting to Rs. 89.6 million which was 80% of the break-even sales. Contribution
margin on the sales was 25%. Variable costs comprised of 45% direct material, 35% direct labour
and 20% overheads.
During a discussion on the situation, the Marketing Director was of the view that no increase in
sales price was possible due to severe competition. However, sales volume can be increased by
reducing prices. The Production Director was of the view that since the plant is quiet old, the
production capacity cannot be increased beyond the current level of 70%.
Accordingly, the management has developed the following plan:
•
A new plant would be installed whose capacity would be 20% more than installed
capacity of the existing plant. The cost and useful life of the plant is estimated at Rs. 30
million and 10 years respectively. The funds for the new plant would be arranged through
a long-term bank loan at a cost of 10% per annum. Capacity utilization of 85% is planned
for the first year of the operation.
•
•
The new plant would eliminate existing material wastage which is 5% of the input and
reduce direct labour hours by 8%.
The existing plant was installed fifteen years ago at a cost of Rs. 27 million. It has a
remaining useful life of three years and would be traded in for Rs. 2 million.
DIL depreciates its fixed assets on straight line basis over their estimated useful lives.
•
To sell the entire production, selling price would be reduced by 2%.
•
Material would be purchased in bulk quantity which would reduce direct material cost by
10%.
•
Direct wages would be increased by 8% which would increase production efficiency by
10%.
•
Impact of inflation on overheads would be 4%.
•
Required:
Compute the projected sales for the next year and the margin of safety percentage after
incorporating the effect of the above measures.
Page 32 of 35
(12)
Faith is trusting ALLAH even when you do not understand his plan.
Ans 1: Digital Industries Limited
Projected sales and margin of safety % for the next year:
Projected sales for the next year
[Production = Sales because on stock]
Margin of safety % to projected sales
Breakeven sales: [33.36 / 30.68%]
[89.6 ÷ 0.7] x 1.2 x 0.85 x 0.98]
[127.95 – 108.72] / 127.95 x 100
[Fixed cost/CS ratio]
Workings:
Variable cost for next year: [After incorporating impact of changes]
Direct Material
[89.6 x 75% x 45% ÷ 0.7 x 1.2 x 0.85] = 44.064
[44.064 ÷ 100 x 95 x 90%]
Direct labour
[89.6 x 75% x 35% ÷ 0.7 x 1.2 x 0.85] = 34.272
[34.272 x 92% x 1.08 x 0.9]
Overheads
[89.6 x 75% x 20% ÷ 0.7 x 1.2 x 0.85] = 19.584
[19.584 x 1.04]
M
127.95
= 15%
108.72
37.67
30.65
20.37
88.69
Note: [Decrease in selling price will not result into decrease in variable cost and vice versa].
Contribution sales ratio:
Sales
V.C
Contribution
127.95
(88.69)
39.26
39.26/127.95 x 100
= 30.68%
Fixed cost for next year:
Fixed cost of 2017: 89.6/80 x 100 = 112 x 25% = 28[At breakeven point contribution is equal to fixed
cost.
Fixed cost of 2017
28
Depreciation of old plant in 2017[27 ÷ 18] (1.5)
26.5
Impact of inflation (4%)
26.5 x 4%
1.06
Depreciation of new plant (30 ÷ 10)
3.00
Interest @ 10% [30 – 2] x 10%
2.80
33.36
Cost of new plant
Trade in value
Cash required
30
(2)
28
Page 33 of 35
Q. 2 Washington Limited (WL) is a listed company having paid-up capital of Rs. 140 million. WL
deals in the manufacturing of washing machines. Following are the extracts from the budgeted
statement of profit or loss for the year ending 31 December 2018:
Sales revenue (Rs. 10,000 per unit)
Cost of goods sold (including fixed cost of Rs. 21.2 million)
Gross profit
Operating expenses (including fixed cost of Rs. 4.5 million)
Profit before taxation
Taxation @ 30%
Profit after taxation
Rs. in ‘000
168,000
(127,000)
41,000
(16,000)
25,000
(7,500)
17,500
Additional information:
(i) An analysis of actual results for the first two months of the year 2018 shows that:
▪ Due to change in import duty structure, imported products have become
available in the market at much cheaper prices. Consequently, it was
decided to reduce the selling price to Rs. 9,500 per unit with effect from
1 January 2018.
▪ 1,500 washing machines were sold during the period.
▪ Due to increase in raw material prices with effect from 1 January 2018,
variable cost of sales has increased by 5%.
(ii) To boost the sales, WL has decided to launch a promotion campaign at an estimated
cost of Rs. 5 million.
(iii)The directors of WL wish to pay 5% dividend to its ordinary shareholders.
However, according to the agreement with the bank, WL cannot pay dividend
exceeding 80% of its profit after taxation.
Required:
Calculate the minimum number of units to be sold in remaining 10 months to enable WL
to pay the desired dividend.
(10)
Ans: 2
Minimum number of unit to be sold in remaining 10 months to pay the desired dividend:
= Total fixed cost + Profit before tax
Contribution per unit
= 30,700,000 (W-1) + 12,500,000 (W-2)
2,203 (W-3)
= 19,609 units
Units already sold during the first two months of the current year = 1,500
Remaining units to be sold (19,609 – 1,500) = 18,109 units
Or
By using CS Ratio:
Contribution/Unit x 100
Sale price/Unit
2,203/9,500 x 100
= 23.19%
30,700,000 + 12,500,000 = 186,287,193
23.19%
186,283,193 ÷ 9,500
= 19,606 units
Remaining units
= 19,609 – 1,500 = 18,109 units
Page 34 of 35
The DUNIYA is not the RESTING place it is the TESTING place.
(W-1) Total fixed cost:
Production fixed cost
= 21,200,000
Operating fixed cost
= 4,500,000
Additional promotion campaign = 5,000,000
Total
30,700,000
(W-2) Required profit before tax:
Dividend to be paid (140,000,000 x 5%)
Required profit after tax (7,000,000 ÷ 80%)
Required profit before tax (8,750,000/70%)
= 7,000,000
= 8,750,000
= 12,500,000
(W-3) Contribution per unit (for first two months)
Sales (1,500 x 9,500)
Variable cost of sales (127,000,000 – 21,200,000)/16,800*x1,500x1.05
Variable operating cost (16,000,000 – 4,500,000)/16,800x1,500
Contribution
Per Unit
14,250,000
9,500
(9,918,750) (6,612.5)
(1,026,786) (684.524)
3,304,464
2,203**
*168,000,000 = 16,800 units
10,000
**3,304,464/1,500 = 2,203
Page 35 of 35