Submitted to:

Mr. Nisar Ahmad

Submitted by:
Mahnoor Mazhar 2400-BC-2018
Course Title:
COST ACCOUNTING

B.Com (Hons.)Session 2018-22

Department of Commerce & Finance
Government College University,
Lahore
Cost Accounting:
Definition:
―Cost accounting is the process of recording, allocating and reporting the various cost incurred in
the operation of an enterprise‖.

Question no 1:
What are objectives of cost accounting and illustrate the usefulness of cost
information for the management.
Objectives of Cost Accounting:

 Disclosure of profitable products

 Provision of information regarding tenders
 Causes of changing in profit or loss
 Future planning
 Provision of perpetual inventory system
 Check on the accuracy of financial accounts
 Analysis and classification of cost
 Costs finding
 Disclosure of inefficiencies
 Control of cost
 Adequacy or inadequacy of selling price
 Whether to manufacture or purchase from outsiders
 Disclosure of controllable and uncontrollable cost
 Cost accounting in the service of government
 Cost accounting is also helpful for creditors
Usefulness of cost information for the management
Cost accounting provides the detailed cost information that management needs to control current
operations and plan for the future. Cost accounting information are also commonly used in
financial accounting, but its primary function are for use by managers to facilitate their decision-making

Question no 2:
Define cost Accounting System
A cost accounting system (also called product costing system or costing system) is a framework
used by firms to estimate the cost of their products for profitability analysis, inventory valuation
and cost control. Estimating the accurate cost of products is critical for profitable operations.
 Difference Between The Process Costing And Job Order Costing System.

Process Costing Job Costing

1: Costs are compiled process-wise and cost per unit Costs are separately ascertained each Job, which is
is the average cost, i.e. the total cost of the process cost unit.
divided by the number of units produced.

2: Production is of standardized products and cost Production is of non-standardized items with

units are identical. specifications and instructions from the customers.

3: Production is for stocks. Production is against orders from customers.

4: Costs are computed at the end of specified period. Costs are calculated when a job is completed.

I. Suggest which costing system do you recommend for the following firms or business
activities also support your recommendation with reasons or justifications.
a) Insaf Associates a law firm
b) Garrison School
c) Lahore investment and Trading Consultants an investment advisory and brokerage firm.
d) Deplix Buety and Health Care
e) Al-Miraj Hotel and Restaurant
f) English Shoes Ltd a shoes making firm
g) J & J Garments.
h) Soft Solutions Ltd a software house.
Solution
Recommendations of Costing System for different Firms

Insaf Associates a Law Firm

I recommend Job order costing for Insaf Associates a Law firm. Because in law firms or
accounting firms every client is different and unique. A law firm uses job order costing to
determine the total amount to charge a client.

Garrison School
I recommend Job order costing for Garrison School. Job order costing is useful for determining if
a job is profitable. It helps the company make estimates about the value of materials, labor, and
overhead that will be spent while doing that particular job.
Lahore Investment and Trading Consultants an investment advisory and brokerage firm

I recommend Job order costing for Lahore Investment and Trading Consultants an investment
advisory and brokerage firm. Because Job order costing is useful for determining if a job is
profitable. It helps the company make estimates about the value of materials, labor, and overhead
that will be spent while doing that particular job.

Deplix Beauty and Health Care

I recommend Job order costing for Depilex Beauty and health Care. Because Job order costing
system is used in situation where many different products, or batches of products, are produce
each period.

Al-Miraj Hotel & Restaurant

I recommend Job order costing for Al-Miraj Hotel & Restaurant. Because Job order costing
system is used in situation where many different products, or batches of products, are produce
each period.

English Shoes Ltd a Shoe Making Firm

I recommend process costing for English Shoes Ltd a software house. A process costing system
is a technique used within the manufacturing industry to determine the total production cost of
a unit of merchandise.

J & J Garments

I recommend process costing for J & J Garments because a process costing system is a
technique used within the manufacturing industry to determine the total production cost of a
unit of merchandise.

Soft Solutions Limited A Software House

Software is a product or service as well. I recommend process costing for Soft Solutions
Limited a Software House. In this situation, it is most efficient to accumulate costs at an
aggregate level for a large batch of products and then allocate them to the individual units
produced. The assumption is that the cost of each unit is the same as that of any other unit,
so there is no need to track information at an individual unit level.

Question no 3:
What is standard costing and what is its usefulness for the management.
Definition of Standard Costing
 Standard costing is an accounting system used by some manufacturers to identify the
differences or variances between:
 The actual costs of the goods that were produced, and
 The costs that should have occurred for the actual goods produced
The costs that should have occurred for the actual good output are known as standard costs,
which are likely integrated with a manufacturer's budgets, profit plan, master budget, etc. The
standard costs involve the product costs, namely, direct materials, direct labor, and
manufacturing overhead.
Usefulness
Five of the benefits that result from a business using a standard cost system are:
 Improved cost control.
 More useful information for managerial planning and decision making.
 More reasonable and easier inventory measurements.
 Cost savings in record-keeping.
 Possible reductions in production costs.

Question no 4:
You recently joined the Fresh Beverages Ltd as a senior cost accountant and
the management assigned you the task of measuring blanket over head rate.
Describe the procedure that you will follow the complete this assignment.
Answer:
To calculate overhead costs, follow these steps:
LIST THE EXPENSES
 Make a comprehensive list of indirect business expenses including items like rent, taxes, utilities,
office equipment, factory maintenance etc. These are your overhead costs. Direct expenses
related to the production of goods and services, such as labor and raw materials, are not included
in overhead costs.
 While categorizing the direct and overhead costs, remember that some items cannot be attributed
to a specific category. Some business expenses might be overhead costs for others but a direct
expense for your business.

ADD THE OVERHEAD COSTS

 Total the monthly overhead costs to calculate the aggregate overhead cost. This is the amount of
money that you need for running your business

CALCULATE THE OVERHEAD RATE

 The overhead rate or the overhead percentage is the amount your business spends on making a
product or providing services to its customers. To calculate the overhead rate, divide the indirect
costs by the direct costs and multiply by 100.
  If your overhead rate is 40%, it means the business spends 40% of its revenue on producing good
or providing services. A lower overhead rate indicates efficiency and more profits.

COMPARE TO SALES
 When setting prices and making budgets, you would need to know the percentage of a dollar that
is allocated to overheads. To calculate the proportion of overhead costs compared to sales, divide
the monthly overhead cost by monthly sales, and multiply by 100.
 For example, a business with monthly sales of $100,000 and overhead costs totaling $50,000 has
($50,000/ ($100,000) x 100 = 50% overheads.

COMPARE TO LABOR COST

 To measure the efficiency with which business resources are being utilized, calculate overhead
cost as a percentage of labor cost. The lower the percentage, the more effectively your business is
utilizing its resources.
 Divide the total overhead cost by the total labor cost for the month and multiply by 100 to express
it as a percentage.

Question no 5:
What is cost variance analysis and illustrate its usefulness for the management
of a firm.
Variance Analysis deals with an analysis of deviations in the budgeted and actual financial performance
of a company. The causes of the difference between the actual outcome and the budgeted numbers are
analyzed to showcase the areas of improvement for the company. At times, it is also a sign of unrealistic
budgets, and therefore, in such cases, budgets can be revised.
Usefulness

 Competitive advantage:
 Identifying the changes required in the business strategy
 Identifying any managerial concerns
 Managing risk:
 Creating shareholder value:
Question no 6:
Describe the difference between piece rate and time rate used to compute the
wages of direct labor. Suggest which rate system is suitable for the measuring
the cost of following labors. Support your recommendation with arguments
a. Answer:
Piece rate system is a method of wage payment to workers based on the quantity of output they have
produced. Time rate system is a method of wage payment to workers based on time spent by them for the
production of output. ... Time rate system pays the workers according to the time spent in the
a) A clerk working in the factory office.
b) A cobbler working in the shoes making factory.
c) A tailor working in a stitching unit.
d) A teacher delivering lectures as a visiting faculty.
e) A carpenter working in the inter wood co,
f) A visiting surgeon working in a hospital.
g) A machine operator working Lakson Tobacco Ltd.
h) A labor supervisor working in a construction firm
Answers:
Recommendations:

 A clerk working in the Office

Time Rate System is suitable for Clerk working in the office because he will be paid according to
the time spent in the office

 A Cobbler working in the Shoes Making Factory

Time Rate System is suitable for Cobbler working in the Factory because he will be paid according to the
time spent in the factory

 A tailor working in a Stitching Unit

Piece Rate System is Suitable for tailor working in a stitching unit because the wage payment to tailors
based on the quantity of output he has produced

 A teacher delivering lecture as a visiting faculty

Piece Rate System will be used because his job is not permanent and he will be paid according to the
lectures he has taken.

 Carpenter Working in the Inter wood Company

Time Rate System is suitable for carpenter working in the company because he will be paid according to
the time spent in the company

 A Visiting Surgeon in the Hospital

Time Rate System is suitable for Surgeon because he will be paid according to the time spent in the
Hospital.

 A Machine operator working in the Tobacco Ltd

Time Rate System is suitable for Machine operator because he will be paid according to the time spent in
the Fcatory

 A Labour Supervisor working in the Construction Firm

Time Rate System is suitable for Labour Supervisor because he will be paid according to the time spent
on Construction Site.

Chapter 11 PROCESS COSTING

Question no 7:
Illustration 11-2 C.P.R., Normal Loss in 1st Department, M.A.Inc., Instituted a new process in
January, during which is started 10,000 units in department ‗A‘, of the units started, 1,000 units a normal
number were lost during the process; 7,000 were transferred to Department ‗B‘ and 2,000 remained in
work in process inventory at the end of the month, 100% complete as to materials and 50% complete as to
conversion cost. Materials and conversion costs of Rs. 27,000 and Rs. 40,000 respectively, were charged
to the Department in January.

Required: Total cost transferred to Department ‗B‘ & Equivalent Production

Solution:

M.A. INC.’s
Department—A
Cost of Production Report
For the month ended January 31,____.
(1) Quantity Schedule:
Units Started ….. …... ….. ….. ….. ….. ….. ….. …… 10,000
Units completed & transferred out ….. …… ….. ….. 7,200
Units still in process (100% material, 50% conversion cost) ….. 2,000
Units lost in process …… ….. …… ….. ….. 1,000
10,000

(2) Cost Charged to the Department: Total Cost Unit Cost

Cost Added by the department:
Materials ….. …… …… …… ….. ….. 27,000 3
Conversion Cost ….. ….. …… ….. ….. 40,000 5
Total Cost to be accounted for ….. …… ….. ….. 67,000 8

(3) Cost accounted for as follows:

Costs of units completed & Transferred out (7,000 units × Rs. 8) Rs. 56,000
WIP ending inventory:
Materials (2,000 units × 100% × Rs.3) ….. ….. ….. ….. 6,000
Conversion cost (2,000 units × 50% × Rs.5) ….. ….. ….. 5,000 11,000
Total cost accounted for ….. ….. ….. ….. ….. … 67,000

(4) Computation Explained:

(i) Equivalent production: = Units completed + Still in process = Total units
Materials = 7,000 + (2,000 × 100%), 2,000 = 9,000 units
Conversion Cost = 7,000 + (2,000 × 50%), 1,000 = 8,000 units
(ii) Calculation of Per Unit Cost: = Total cost + Total units
Materials = Rs. 27,000  9,000 = Rs. 3.00 per unit
Conversion Cost = Rs. 40,000  8,000 = Rs. 5.00 per unit
Total cost per unit = Rs. 8.00 per unit

Illustration 11-4: C.P.R., Normal Loss in 2nd Department. For December, the production Control
Department of Sitara Chemical, Inc. reported the following production data for Department—2.
Transferred in from Department—1 55,000 liters
Transferred out to Department — 3 39,500 liters
In process at the end of December
(with 1/3 labor and factory overhead) 10,500 liters
All material were put into process in Department — 1
The cost department collected these figures for Department — 2
Units cost for units transferred in from Dept. — 1 Rs: 180
Labor cost in Department — 2 Rs: 27,520.00
Applies factory overhead Rs: 15,480.00

Required: (a) Schedule of Equivalent Production

(b) Cost of Production Report

Solution:
Sitara Chemical, Inc
Department — 2
Cost of Production Report
For the month of December
(1) Quantity Schedule: Liters Liters
Units received from department —1 ….. …… ….. ….. …. 55,000
Units transferred out …… …… …… …… …… ….. …. 39,500
Units still in process (1/3 Labor &FOH) …… …… ….. …. 10,500
Units lost ….. …… …… …… …… …… ….. …. 5,000
55,000

(2) Cost Charged to the Department: Total Cost Unit Cost

Cost from preceding department (55,000 × 1.80) ….. …… Rs. 99,000 Rs. 180
Cost added by the Department:
Labor Cost …… ….. ….. ….. …… ….. ….. 27,520 0.64
Factory overhead cost ….. …... …… ….. ….. 15,480 0.36
43,000 1.00
 142,000 2.80
Add Adjustments units cost transferred in (w — 1) … 0.18
Total cost to be accounted for: ….. ….. ….. ….. 142,000 2.98
(3) Cost Accounted for as Follows:

Cost of units transferred out (39,500 × Rs. 2.98) Rs. 117,710

WIP ending inventory:
a. Adjusted cost from preceding Deptt. (10,500 × 1.98) Rs. 20,790
b. Cost added by Department:

Labor cost (10,500 × 1/3 × Rs. 0.64) ….. …… ……. …… ….. 2,240
Factory overhead cost (10,500 × 1/3 × Rs. 0.36) ….. ….. ….. ….. 1,260 24,290
Total cost accounted for ….. ….. ….. ….. ….. …… …… 142,000
(4) Computation Explained:
(i) Equivalent Production = Units completed + Still in process = Total units
Labor = 39,500 + (10,500 × 1/3), 3500 = 43,000 liters
FOH = 39,500 + (10,500 × 1/3), 3500 = 43,000 liters
(ii) Calculation of Per Unit Cost: = Total cost + Total units
Labor = Rs. 27,520  43,000 = Rs. 0.64 per unit
FOH = Rs. 15,480  43,000 = Rs. 0.36 per unit
Total cost per unit = Rs. 1.00 per unit

Workings:
(W—1) Adjustment of units lost
Formula:

= – Units cost received from previous dept.

Cost received from previous dept. = Rs. 99,000

Units received from previous dept. = Rs. 55,000 units
Unit cost received from previous dept. = Rs. 1.80 per liter
Units lost = 5,000 units

Loss to be Adjusted = – Rs. 1.80

= Rs. 1.98 – Rs. 1.80 = Rs. 0.18 per unit

Illustration 11-11. C.P.R., Increase in Number of Units, Normal Loss in Department 2: Mixing
department of Dulux Company during April received 8,800 units from the preceding department at a cost
of Rs. 70,400 to which materials are added resulting in 30% increase in number of units. Cost incurred by
mixing department during April are: materials Rs. 52,500, labor Rs. 17,500 and factory overhead Rs.
10,000. On account of normal spoilage 440 units are lost. 9,500 units are transferred to the next
department and remaining units are 1/3 complete.
Required: Prepare a cost of production report for the month of April.
Solution:
Dulux Company
Cost of Production Report
Mixing Department
For the Month of April____
(1) Quantity Schedule:
Units received from previous department ….. ….. …… …… 8,800
Units added by the department (8800 × 30%) ….. ….. …… …… 2,640
11,440
Units transferred to finished goods storeroom ….. ….. …… …… 9,500
Units still in progress (1/3 complete) …… 1,500
Units lost in process ….. …… …… …… 4,40
11,440
(2) Cost Charged to the department: Total Cost Unit Cost
Adjusted Cost from previous department ….. …… …… Rs. 70,400 Rs, 6.40
Cost added by the department:
Material cost ….. ….. …… …… …… ……. Rs. 52,500 Rs. 5.25
Labor cost ….. ….. …… …… …… ……. 17,500 1.75
Factory overhead cost ….. …… ….. …… ……. 10,000 1.00
80,000 8.00
Total cost to be Accounted for: …… …… …… ……. 150,400 14.40
(3) Cost Accounted for as Follows:

Cost of units transferred to storeroom (9,500 units × Rs. 14.40) Rs. 136,800
WIP ending inventory:
Adjusted cost from preceding dept. (1,500 × 6.40) Rs. 9,600
Material cost (1,500 × 1/3 × Rs. 5.25) ….. ….. …… …… 2,625
Labor cost (1,500 × 1/3 × Rs. 1.75) ….. …… …… …… 875
Factory overhead cost (1,500 × 1/3 × Rs. 1.00) …… …… …… 500 13,600
Total cost accounted for ….. …… …… …… …… …… ….. 150,400
(4) Computation Explained:
(i) Equivalent Production = Units completed + Still in progress = Total units
Materials, Labor, FOH = 9500 units + (1500 units × 1/3), 500 = 10000 units
(ii) Calculation of Per Unit Cost = Total cost + Total units
Materials = Rs. 52,500  10,000 units = Rs. 5.25 per unit
Labor = Rs. 17,500  10,000 units = Rs. 1.75 per unit
 FOH = Rs. 10,000  10,000 units = Rs. 1.00 per unit
Total cost per unit = Rs. 8.00 per unit
Workings:
(W — 1) Adjusted unit cost from preceding department
= Rs. 70,400  11,000 units = Rs. 6.40

Illustration 11-15. C.P.R., Abnormal loss in 2nd Department. During December following costs
were incurred in Department 2 of Al-Basit Company: direct materials Rs. 41,130; direct labor Rs.
35,730. Factory overhead is applied @ 80% of direct labor cost.
During the month department 2 received 2,415 units from preceding department at a unit cost of Rs.
25. During the month process on 2,285 units were completed but out of the completed units 85 units
are still in department awaiting transfer. Units in process at the end of month were 40% converted.
There was no normal loss of units during the month; however, 75 units were lost due to defective
workmanship.
In Department 2 inspection is made at the end of process and materials are added only to those units
pass quality control specifications.
Required: Cost of Production Report.

Solution:
Al Basit Company
Department 2
Cost of Production Report
For the Mont Ending December 31, _____
Quality Schedule
Units received from previous department 2,415
Units transferred out 2,200
Units completed but awaiting transfer 85
Units still in process (0% material, 40% converted) 55
Units lost in process – Abnormal loss (0% material, 100% converted 75 2,415

Cost Charged to Department Total Cost Per Unit Cost

Cost from preceding department (2,415 units × Rs.25) Rs. 60,375 Rs. 25.00
Cost added by department
Direct Materials 41,130 18.00
Direct labor 35,730 15.00
Factory overhead applied (80% of D.L. cost) 28,584 12.00
Total cost added by department 105,444 45.00
Total cost to be accounted for 165,819 70.00

Cost accounted for as follows: Rs. Rs.

Cost transferred to out (2,200 units × Rs. 70.00) = 154,000
Cost of units completed but awaiting transfer (85 units × Rs. 70.00) = 5,950
Cost of Abnormal loss (w-1) 3,900

Work in Process Ending Inventory

Cost from preceding department (55 units × Rs. 25.00) = 1,375
Materials (55 units × 0% × Rs. 18.00) = ____
Labor (55 units ×40% × Rs. 15.00) = 330
FOH (55 units × 40% × Rs. 12.00) = 264 1,969
 Total cost accounted for 165,819

Computations Explained
Equivalent Production =Units completed + Completed but on hand + SIP + Abnormal loss = Total Units
Materials = 2,200 units + 85 + (55 units × 0%),0 + (75 units × 0%), 0 = 2,285 units
Labor & FOH = 2,200 units + 85 + (55 units × 40%),22 + (75 units × 100%), 75 = 2,382 units

Per Unit Cost = Total cost  Total Units

Materials = Rs. 41,130  2,285 units = Rs. 18.00
Labor = Rs. 35,730  2,382 units = Rs. 15.00
FOH = Rs. 28,584  2,382 units = Rs. 12.00
(w-1) Cost of Abnormal loss
Cost received from preceding department (75 units × Rs. 25.00) = Rs. 1,875
Materials 75 units × 0% × Rs. 18.00 = ____
Labor 75 units × 100% × Rs. 15.00 = 1,125
FOH 75 units × 100% × Rs. 12.00 = 900
Total cost accounted for Rs. 3,900

Illustration 11-17: C.P.R,. Two Departments without Loss. The Alpha Delta Manufacturing Company
produces one product called Omega which passes through two departments. The company uses process
cost system. Costs for the month are as follows:
Materials Labor Mfg.Exp.
Department A Rs. 23,760 Rs. 23,760 Rs. 11,880
Department B Rs. 35,640 Rs. 11,520 Rs. 17,280

There was no beginning inventory

Units started in process 3,00,000
Units in process August 31:
6,000 — estimated to be 50% complete in Department A.
6,000 — just complete by Department A but in Department B.
Required: You are required to prepare a cost of production report for the month of August.

Solution:
Alpha Delta Manufacturing Company’s
Cost of Production Report
For the Month ended August,____.

(1) Quantity Schedule: Department -A Department-B

Units started ….. …… ……. …… ……. ……. 3,00,000 ____
Units received from previous department …… ……. ____ 294,000
Units completed and transferred out …… ….. ……. 294,000 288,000
Units still in process (50%) 6,000 (0%) 6,000
3,00,000 294,000
(2) Cost charged to The Department:
Cost received from previous department
Cost added by the department:
 Total Units Total Unit
Materials …. ….. …. ….. cost cost cost cost
Labor …. ….. ….. ….. 0 0 58,800 0.20
Mfg. Expenses ….. ….. ….. 23,760 0.08 35,640 0.12375
Total cost added by the department 23,760 0.08 11,520 0.04
Total cost to be accounted for: 11,880 0.04 17,280 0.06
59,400 0.20 64,440 0.22375
59,400 0.20 123,240 0.42375
(3) Cost Accounted for as Follows: Department - A Department-B
Cost of units transferred out (294,000 × Rs. 0.20) = 58,800 (288,000 × Rs. 0.42375) = 122,040
WIP ending inventory:
Cost received from previous depth: (6,000 × 0.20) = 1,200
Materials (3,000 × Rs. 0.08), 240 ----
Labor cost (3,000 × Rs. 0.08), 240 ----
FOH cost (3,000 × Rs. 0.04), 120 = 6,000 ----
Total cost accounted for …. ….. ….. …. 59,400 13,240

(4) Computation Explained:

(i) Equivalent Production Schedule – Department –A:
= Units completed + Still In Process = Total Units
Materials, Labor & FOH = 294,000 + (6,000 × 50%), 3,000 = 297,000 units
(ii) Calculation of Per Unit Cost Department – A:
= Total cost  Total units
Materials = Rs. 23,760  297,000 units = Rs. 0.08 per unit
Labor = Rs. 23,760  297,000 units = Rs. 0.08 per unit
FOH = Rs. 11,880  297,000 units = Rs. 0.04 per unit
Total cost per unit = Rs.0.02 per unit
(iii) Equivalent Production Schedule – Department – B:
= Units completed + Still In Process = Total Units
Materials, Labor & FOH = 288,000 + (6,000 × 0%), 0 = 288,000 units

(iv) Calculation of Per Unit Cost Department – B:

= Total cost  Total units
Materials = Rs. 35,640  288,000 units = Rs. 0.12375 per unit
Labor = Rs. 11,520  288,000 units = Rs. 0.04 per unit
FOH = Rs. 17,280  288,000 units = Rs. 0.06 per unit
Total cost per unit = Rs.0.22375 per unit
 Chapter 10 FOH-DEPARTMENTAIZATION
Question no 8:
APPORTIONMENT TO PRODUCTION DEPARTMENTS ONLY:
In this case, cost of each service department is apportioned only to production departments without
apportioning it to other departments.
Illustration No: 2- Primary & Secondary Apportionment. The following data were obtained
From the books of A, B. Engineering Company for the half-year ended 30th September, 2003.
Prepare a Departmental Distribution Summary.

Production Departments Service Departments

Direct wages Rs. A B C X Y

Direct Materials Rs. 7,000 6,000 5,000 1,000 1,000
Employees Rs 3,000 25,00 2,000 1,500 1,000
Electricity No. 200 150 150 50 50
Light points Kwh 8,000 6,000 6,000 2,000 3,000
Assets value No. 10 15 15 5 5
Area occupied Sq.yd. 50,000 30,000 20,000 10,000 10,000
800 600 600
200 200

The expenses for 6 months were:

Stores overhead Rs.400 Depreciation Rs. 6,000
Motive power 1,500 Repairs and maintenance 1,200
Electric lighting 200 general overheads 10,000
Labor welfare 3,000 rent and taxes 600
Apportion the expenses of Department X in the ratio of 4:3:3 and that of department Y in apportion to
direct wages, to department A.B and C respectively.
Solution:
OVERHEAD DISTRIBUTION SUMMARY
Items Basis of Total Producing depts. Service depts.
apportionment A B C X Y
Rs. Rs. Rs. Rs. Rs.
Direct wages Actual 2,000 -- -- -- 1,000 1000
Direct Materials Actual 2,500 -- -- -- 1,500 1,000
Stores overhead Direct material 400 120 100 80 60 40
Motive power Kwh. 1,500 40 360 360 120 180
Lighting No. of points 200 480 60 60 20 20
Labor welfare No. of employees 3,000 1,000 750 750 250 250
Depreciation Assets value 6,000 2,500 1500 1,000 500 500
Repair and min. Assets value 1,200 500 300 200 100 100
General overhead Direct wages 10,000 3,500 3,000 2,500 500 500
Rent and taxes Area occupied 600 200 150 150 50 50
Total 27400 8,3240 6,220 5.100 4,100 3,640
Department X 4:3:3(given) 1,640 1,230 1,230
Department Y Direct (- 4,100) (-3,630)
wage(7:6:5) 1,416 1,213 1,011 ---- ----
Total: 27,400 11,396 8,663 7,341

ILLUSTATION NO: 5-RECIPROCAL APPORTIONEMNT

By using previous illustration,
REPEATED DISTRIBUTION SUMMARY
SECONDARY DISTRIBUTION SUMMARY

Items Production Depts. Service Depts.

A B C X Y
Rs. Rs. Rs. Rs. Rs.
Total as per primary 6,300 7,400 2,800 4,500 2,000
distribution
Department X 1,800 1,350 900 (-)4,500 450
Department Y 735 735 490 490 (-2450)
Department X 196 147 98 (-)490 49
Department Y 15 15 10 9 (-)49
Department X 4 3 2 (-)9 --
Total 9,050 9,650 4,300 -- --

Working Note
In the above solution first or all the cost of service department X is apportioned to A. B. C and Y in the
ratio given. Then that cost of service department Y, Rs. 2,450 (i.e. 2,000 + 450) has been apportioned to
department and X in the given percentage. The account of department X is again open with Rs.49 allotted
to department Y is distributed to department A.B. C and X. Then Rs.9 allotted to department X is
distributed to and C. Nothing has been allotted to department Y {s the share of department Y is quit
negligible. In this way the entire costs or service department X and Y are apportioned to Production
department A.B and C. It should be noted that, unlike Simultaneous ' Equations Method, this method
produces approximate results. But the advantage of this method is that it can be conveniently applied
where the number of service department is more than two.
Illustration No: 6
Reciprocal Apportionment: A factory has three production department A, B and C and has two service
departments P and Q. The overhead department distribution summary shows the following:
A Rs.650, 000 P Rs.120, 000
B Rs.600, 000 Q Rs.100, 000
C Rs.500, 000
The service department expenses are allotted on a percentage basis as follows:
Productive department service department
A B C P Q
`Service dept. P 30% 40% 15% -- 15%
Service dept Q 40% 30% 25% 5% _
Show how the expenses of two service department are to be charged to productive department under
―repeated distribution‖ methods and under ―simultaneous equation‖ method.
SOLUTION
(a)Repeated Distribution Method
SECONDARY DISTRIBUTION SUMMARY
 Items Production Depts. Service Depts.
A B C P Q
Rs. Rs. Rs. Rs. Rs.
Total as per primary 650,000 600,000 2,800 120,000 100,000
distribution
Department P 36,000 48000 18,000 (-)120,000 18,000
Department Q 47,200 35,400 29,500 5,900 (-)118,000
Department P 1,770 2,360 885 (-)5,900 885
Department Q 354 266 221 44 (-885)
Department P 13 18 7 (-)44 6
Department Q 3 2 1 (-)6
Total 735,340 686,046 548,614 -- --
Working note: Fraction have been avoided as this method itself produces approximate result
(b)Simultaneous equation method
Let P= overhead of service department p
Q=overhead of service department Q
P=120,000+5% of Q …..(1)
Q=100,000+15%of P ……(2)
P=120,000+0.05 of Q …..(1)
Q=100,000+0.15 of P ……(2)
By putting value of ―Q‖ in equation (1)
P=120,000+0.05 (100,000+0.15P)
P=120,000+5000+0.0075P
P=125,000 + 0.0075P
P-0.0075P=125,000
0.9925 P =125,000
P=125,000 divided by0.9925 = Rs.11, 25,945
By putting value of ―p‖ in equation (2)
Q=100,000+0.15(1, 25,945)
Q=100,000 + 18.892 approx.
Q=118,892

Chapter 8 LABOUR COST – ACCOUNTING AND CONTROL

Question no. 9
Illustration 8-12: The standard time fixed to complete a product is 12 hours at Rs.0.25 paisa per
hour Time wages are allowed to workers taking more than the time allowed. But workers who
complete the job in standard time or less receive a straight piece work rate plus 10% bonus i.e. 12
hours at Rs.0.275. Calculate the wages earned by A, B, C and D who complete the job in 15, 12, 10
and 8 hours respectively. What will be their effective hourly rate? If the overhead rate chargeable
to production is Rs.0.50 per hour, what will be the "cost of conversion" (Labor and overheads) per
piece produced by each worker?

Solution:

Workers Actual Regular FOH @ Cost of Effective Cost of

hours wages Rs.0.50 conversion hourly rate conversion
worked (w-1) 3+4 per hour
5+2

1 2 3 4 5 6 7
A 15 3.75 7.50 11.25 0.25 0.75
B 12 3.30 5.00 7.75 0.275 0.775
C 10 2.75 5.00 7.75 0.275 0.775
D 8 2.20 4.00 6.20 0.275 0.775
Working:
(W-1) Regular wages = A = 15 H * 0.25 = Rs.3.75
B = 12 H 0.275 = Rs.3.30
C = 10 H x 0.275 = Rs.2.75
D = 8 H x 0.275 = Rs.2.20
Illustration 8-13: Calculate total monthly remuneration of three workers X, Y and Z from the
following data:
(a) Standard production per month per worker 1.000 units. Actual production during the ration:
month: X 850 units. Y 750 units. Z. 950 units.
(b) Piece work rate is Rs.0.10 per unit (actual production).
(c) Additional production bonus is Rs.10 for each percentage of actual production exceeding 80%
actual production over standard (examples: 79% nil. 80% nil, 81% Rs.10: 82% Rs.20: 83% Rs. 30 and so
on).

(d) Dearness pay fixed: Rs.500 per month

Solution:
Workers Actual % age actual Piece rate Bonus Rs. Dearness Total
production with standard earning (w-2) allowance Earnings
(w-1) @Rs.0.10 4+5+6

1 2 3 4 5 6 7
X 850 units 85% 85 50 500 635
Y 750 units 75% 75 … 500 575
Z 950 units 95% 95 150 500 745

Working:
(W-1) = Actual production/Standard production *100
X =850/1000 x 100 = 85%
Y =750/1000 x 100 = 75%
Z = 950/1000 x 100 = 95%
 W-2 Bonus X = 85% Rs.50
Y = 75% Nil
Z = 95% RS. 150

Illustration 8-14: The following are the particulars given to you: Standard time 10 hours:
Time rate Rs.10 per hour:
Prepare comparative table under Halsey Premium Plan and Rowan Premium Plan if time taken is 9 hours,
8 hours. 6 hours. 4 hours and 3 hours. The table should be clearly show the amount of bonus payable, the
amount of total wages and labor cost per hour under the two methods. What conclusions do you draw
from the table.
Comparative Table Showing Total wages.
Hours Hours Bonus Total Wages Labor cost per hour
taken saved Halsey Rowan Halsey Rowan Halsey Rowan
1 2 3 4 5 6 7 8
9 1 5.00 9 95 99 10.55 11.80
8 2 10.00 16 90 96 11.25 12.00
6 4 20.00 24 80 84 13.33 14.00
4 6 30.00 24 70 64 17.50 16.00
3 7 35.00 21 65 51 21.66 17.00

Hours saved = Standard time-hours taken

(1) Halsey Bonus = Hours saved * rate * 50%
= 1 H x Rs.10 * 50% = Rs.5
= 2 H * Rs.10 * 50% = Rs. 10
= 4 H x Rs.10 50% = Rs.20
= 6 H x Rs.10 50% = Rs.30
= 7 H * Rs.10 * 50% = Rs.35
Rowan Bonus = Time taken x Time Saved x rate / Time allowed
= 9H x 1H x Rs.10 / 10H = Rs.9
= 8Hx2H x Rs.10 / 10H = Rs.16
= 6H X4H x Rs.10 / 10H = Rs.24
4H x 6H x Rs. 10 / 10H = Rs.24
3H x 7H x Rs.10 / 10H =Rs: 21
Total wages = Hours taken * rate + Halsey Bonus
= Hours taken x rate + Rowan Bonus
Labor cost per hours = Total wages Halsey + Hours taken
= Total wages Rowan + Hours taken
From the above calculations, following conclusions can be drawn: -
Under Rowan Plan, bonus is higher when time saved is less than 10% than Halsey Plan, when time saved
is more than 50%, bonus decreases under Rowan Plan. However, under Halsey Plan goes on increasing
with the increase in time saved. So, Halsey provides more incentive to workers
ILLUSTRATION 8-16: the standard for completion of certain job is fixed at 200 hours .Normal wages
are paid to the workers according to the time rate which is 50 paisa per hour .If the job is completed in
lesser time, a bonus is paid to the worker calculated on following lines:
Up to first 20% saving in time ……….10% of corresponding saving in time
For and within next 20% ………..25% of corresponding saving in time
 For and within the next 30% saving …………50% of corresponding saving in time
For and within the next 30% saving………….30% of corresponding saving in time
Compute the total earning and earning per hour of following workers:
Workers time taken
Mr. W 210 hours
Mr. X 160 hours
Mr. Y 120 hours
Mr. Z 50 hour
SOLUTION:
(a) Mr. W
Standard time: 200 hours
Time taken: 210 hours
Time saves: Nil
Basic wage rate: Rs.0.50 per hour
Total earning:
Basic Wages = time taken in to rate per hours
=210 into Rs. 0.50
Add bonus
Total earning:
Per hours earnings = total earning /time taken
=Rs.105/210 hours
Per hour earning is Rs. 0.50 per hour.
(b) Mr. X
Standard time = 200 hours
Time taken = 160 hours
Time saved = 40
Time saved in %age = time saved /standard time *100
=40 hours/200 hours *100
=20%
Basic wage rate =Rs.0.50 per hours
Time saved in percentage is 20%
Time saved in hours (200*20%) 40 hours
Total Earning:
Basic wages =time taken into rate per hours
= 160 hours * Rs.0.50
Add bonus = 40 hours *0.5*10/100:
Total earning:
Per hour earning =total earning /time taken
=Rs.82.00/160 hours
Per hour earning= Rs.0.5125 per hour

(c) Mr. Y
Standard time = 200 hour
Time taken = 120 hour
Tie saved = 80 hour
Time saved in percentage = time saved /standard time*100
=80 hours/200hours*100
 =40%
Basic wage rate =Rs.0.50 per hour
Time saved in %age = 20% +20% = 40%
Time saved in hours = (200*20%) 40 hours
(200*20%) 40 hours =80 hours
Bonus rate =10%
=25%
Total earning:
Basic wages:
Basic wages: time taken* rate per hour
=120 hours *Rs.0.50 Rs.60.00
Add bonus = 40 hours *0.50*10/100 Rs.02.00
=40 hours *0.50 * 25/100 Rs.05.00
Total earning: 67.00
Per hour earning: total earning/time taken
=Rs.67.00/120 hours
Per hour earning = Rs.0.55833 per hour

(d) Mr. Z
Standard time = 200 hours
Time taken= 50 hours
Time saved = 150 hours
Time saved in %age= time saved /standard time *100
=150 hours/200 hours*100
=75%
Basic wage rate = Rs.0.50 per hour
Time saved in percentage = 20% +20%+30%+5%=75%
Time saved in hours= (200*20%) 40 hours
(200*20%) 40hour
(200*30%) 60hours
(200*5%) 10 hours= 150 hours
Bonus Rate =10% 25% 50% 30%
Total earning:
Basic wages:
Basic wages: = time taken * rate per hour
=50 hours *Rs.0.50
Add bonus =time saved * rate per hour*bonus rate
=40 hours * Rs.0.50*10/100: Rs.02.00
=40 hours *Rs.0.50 *25/100: 05.00
=60 hours *Rs.50 *50/100: 15.00
=10 hours*Rs.0.50*30/100: 01.50
Total earning: 48.50
Per hour earning =total earning/time taken
=Rs.48.50/50 hours
Per hour earning = Rs.0.97 per hour
Illustration No: 17- In a manufacturing concern 20 workers work in a group. The concern follows a
group incentive bonus system whereby each workman belongs to the group is a on the excess output over
the hourly production standard of 250 pieces, in addition to his normal wages at hourly rate. The excess of
production over the standard is expressed as percentage and two-thirds of this percentage is considered to
the share of the workman and is applied on the notional hourly rate Of Rs.6 (considered only for purpose
of computation of (ÜJS.) The output data for a week are stated below:

Days Man-hours worked Output tin pieces'

Monday 160 48,0000
Tuesday 172 53,000
Wednesday 164 40,000
Thursday 168 52,000
Friday 160 46,000
Saturday 160 42,000
984 281,000
You are required to:

(1) Work out the amount of bonus for the week and the average rate at which each workman is to be paid
the same.
(i) Compute the total wages including bonus payable to R who worked for 48 hours at an hour rate of
Rs.2.50 and to W' who worked for 52 hours at an hourly rate of Rs3 (See No. 12).
Solution

Computation of Group Incentive Bonus

Days Man- Standard Actual Excess % of excess Amount

hours output output pieces output output of
worked incentive
1 2* 3 4* 5* 6*
Monday 160 40,000 48,000 8,000 20 128
Tuesday 172 43,000 53,000 10,000 23.26 160
Wednesday 164 41,000 40,000 -- -- ---
Thursday 168 42,000 52,000 10,000 23.81 160
Friday 160 40,000 46,000 6,000 15 96
Saturday 160 40,000 42,000 2,000 5 32

Total 984 246,000 281,000 36,000 Total bonus 576

Share in bonus of each individual workman;

Rs. 76/984 = Rs. 0.59 per hour.

(2) Computation of individual workman

Hours worked
Hourly rate of payment
Total wages at hourly rate (a) × (b)
Shares of incentive bonus (a) × 0.59
Total wages payable (c) + (d)

Working notes (statement of computation of group incentive bonus)

Column (2) = column 1 ×250 pieces = 40,000 pieces
Column 4 = column 3- column 2
Column 5= column 4/ column 3 ×100
Column 6 = column 1 (column 5× 2×6/ 100×3)
e.g. 160 (20×2×6/ 100×3) = Rs. 128

ILLUSTRATIN NO: 8-19- The following particulars apply to an operation of an automatic machine;
Standard time per piece = 15 seconds. Normal rate per hour = Rs. 1.20

Difference to be applied;
80% of piece rate below standard.
120% of piece rate at or above standard.
Worker A produces 2,000 units per day and worker B produces 1,800 units per day.
Calculate their earning under straight piece rate plan and Taylor‘s differential plan.
Solution
Workers Actual Straight Standard Taylor’s Taylor’s
production piece rate differential differential
Piece rate earning
1 2 3 4 5 6
A 2,000 Rs. 10 Above Rs. 0.006 Rs. 12
B 1,800 Rs. 09 Below Rs. 0.004 Rs. 7.20

Workings;
Column 2× 0.005 rate per unit × 0.005
Standard production per day= 15 seconds
Standard production per minute= 60 seconds/ 15 seconds = 4 pieces

Illustration 8-28: The GTJ Company has been asked to bid on a contract to supply 220,000
units of gear assemblies to be delivered as follows:
January — June 100,000 units and July — December, 120,000
If the company gets the contract, the entire plant will be devoted to its production. The
Time required for the initial 100,000 units is estimated at 4 hours per unit. For -the second
120,000 units, labor will be more efficient, and it is expected that the time required for each unit
will be cut by provided an incentive bonus of one half the savings in labor cost is paid to
employees. Overtime premiums are to be excluded when savings are computed. A force 0/400
men will be employed at a base rate of Rs.20 per hour with time and a half for overtime, the plan
normally operates on a 5 day, 40 hour week. Employees are paid for two weeks vacations in June
and for six holidays. Production will be scheduled as follows:
January — June: 24 weeks with 2 holidays;
July — December; 26 weeks with 4 holidays
Required: You have been asked to prepare estimates of direct labor and labor -- related Costs
that would be incurred on this contract. Prepare costs estimates for the following:
(a) Wages paid at regular rate;
(b) Overtime premium payments;
(c) Incentive bonus payments; and
(d) Vacation and holiday pay.

Solution:
Wages Paid at Regular Rate:
Time required from Jan — June
To complete 100.000 units (100,000× 4 hrs) 400.000 hours
Time required form July — Dec.
To complete 120,000 units (120,000 x 3.6 hrs) (w-l) 4322000 hours
Total time required to complete 220,000 units 832,000 hours
Basic rate per hour— Rs.8.00
Wages paid
Total wages paid
= 832,000 hours x Basic rate per hour
= 832,000 units x Rs.8.OO
Total wages paid = Rs. 6,656,000
Overtime Premium Payments:
Jan. to June Hours Hours
Time required to compete100.000 units 400,000
Time Available
24 weeks x 40 hours x 400 Employees 384,000
2 Holidays x 8 hours x 400 Employees 6,400 377,600
Overtime hours required
22,400
July to Dec
Time required to complete120,000 units 432,000
Time available
26 weeks x 40 hours x 400 Employees 416,000
4 Holidays x 8 hours x 400 Employees
Overtime hours required 12,800 403,200
Total Overtime Hours: 28 800
Overtime hours from Jan to June 22,400
Overtime hours from July to Dec 28,800
Total Overtime Hour 51,200

Over premium payments = overtime × overtime rate per hour

= 51,200 hours (w-2)

Rs. 204,800
Incentive bonus payments Hours
Time required from July to December
= 120,000 units 4 hours 480,000
Less Time to be taken 120,000 units 3.6 hours 432,000
Total time to be saved
Value of the time saved=48.000 hours Rs.8.00 per hour
Rs.384,000
Bonus: 1/2th of the value of time saved = 384,000 h×1/2
= Rs.192000

Total vacation and holiday payments Hours

2 weeks 40 hours x 400 Employees 32,000
6 holidays x 8 hours x 400 Employees 19,200
51 ,200
Total vacation and holiday payments = 51,200H x Rs.8.OO per hour
Rs.409,600
Workings:
(W - I) Time required for one unit from July to Dec. =4 hours * 90% = 3.6 hours
(W —2) Overtime rate per hour = Rs.8.00 per hour h
= Rs.4.00 per hour

Chapter 9 FOH – COSTING & ACCOUNTING

Question no. 10
Illustration 9-2: FOH Variance Analysis. After the estimated factory overhead cost of the Shah
Manufacturing Company has been classified as being either fixed or variable and estimated
accordingly, the following balances were available:
Fixed Factory Overhead Costs Rs. 72,000
Variable Overhead Costs 36,000
Estimated Direct Labor Hours 90,000
At the end of the period it was found that the company attained a capacity of 80% of that budget and that
actual factory overhead costs amounted to Rs.88, 000.
You are required to compute:
(a) Under or over applied overhead. (b) Budget and volume variances.
Solution:
(a) Under or over applied Factory Overhead Cost:
Actual Factory Overhead Rs. 88,000
Less Applied Factory Overhead
= Actual capacity * FOH applied rate
= 72,000 hours (w-1) Rs.1.20 (W-2) 86,400
Under applied Factory Overhead cost /unfavorable (Dr.) 1,600
(b) Budgeted variance
Actual Factory Overhead Rs. 88,000
Less: Budgeted / estimated FOH for 72.000 hours
= Fixed FOH cost Rs. 72,000
Add = Variable FOH cost
72,000 hours x Rs.0.40 (W-3) 28,800 100,800
Favorable 12,800

Volume variance
Estimated/budgeted FOH cost for 72,000 hours 100,800
Less Applied Factory Overhead 86,400
Unfavorable (Dr) 14000
Workings:
(W-1) Actual Capacity
= Estimated FOH cost for Normal capacity x Normal capacity
= 90,000 x 80/100 = 72,000 hours
(W-2) Factory Overhead Applied rate
= 72,000+ 36,000 / 90,000 = RS.1.20 per labor hour
(W-3) Variable FOH rate per hour
=Estimated variable cost for Normal capacity / Normal capacity
= 36,000 / 90,000 = Rs.0.40 per hours
Illustration 9-3: Calculation of Budgeted Allowance & Actual FOH. The Umar Company was
totally destroyed by fire during June; however, certain fragments of its cost records was recovered
with the following data; Idle capacity variance Rs. 1,266 favorable; Spending variance Rs. 779
unfavorable and Applied factory overhead Rs. 16,234.
Repaired:
(1) Budgeted allowance, based on capacity utilized.
(2) Actual factory overhead. (See Problem No.3)
Solution:
Budgeted allowance based on capacity utilized:
 Actual FOH cost 15,474
Less: Budgeted allowance based on capacity: 14968
Spending variance (unfavorable) 779
2. FOH cost incurred
Budgeted allowance 14968
Less Applied FOH (given) 16,234
Idle capacity variance (favorable) 1,266
(I) Budgeted allowance = Applied FOH - Idle capacity variance
(2) Budgeted allowance is then used for calculating actual Factory Overhead.
(3) Actual FOH = Budgeted allowance + spending variance
Illustration 9-4: FOH Variance Analysis, Variable FOH rate is given. The Fixed FOH is Rs. 5,000
and Variable FOH is budgeted at Rs. 1.10/unit. Normal volume is 5,000 units. Actual FOH is Rs. 11,500
and Output was 6,000 units.
Required: (1) FOH applied rate.
(2) Under or over applied factory overhead.
(3) Spending Variance.
(4) Idle Capacity Variance.
Solution:
Applied Factory Overhead Rate
Fixed FOH rate per unit = Estimated Fixed FOH cost x Normal volume
= Rs.5, 000/5,000 units
= Rs. 1.00 per unit
FOH applied rate: = Fixed FOH rate + Variable FOH rate
= Rs.1.00+ Rs. 1.10
= Rs.2.10 per unit
(2) Over or Under Applied FOH Cost
Actual FOH Cost Rs. 11.500
Less Applied FOH cost
= Actual capacity * FOH applied rate
= 6,000 units * Rs.2.10 Rs. 12,600
Over Applied FOH Cost/Favorable (Cr) 1,100
(3) Budgeted Variance
Actual Factory Overhead Cost Rs. 11.500
Estimated FOH cost for 6,000 hours
Fixed FOH cost RS.5000
Add Variable FOH cost
= 6,000 units * Rs.1.10 RS.6600 RS.11, 600
Favorable (Cr.) 100
Volume Variance
Budgeted/Estimated FOH cost for 6,000 units Rs.11, 600
Applied FOH cost 12,600
Favorable (Cr.) 1,000
Proved:
Budgeted variance (Cr.) Rs. 100
Volume variance (Cr.) 1,000
Over Applied (Cr.) 1,100
(2)Check of Volume Variance
= Difference between Normal and Actual capacity * Fixed FOH rate per unit
= 1,000 units (5,000 - 6,000) * Rs.1.00
= Rs.1, 000
Illustration 9-6: Budgeted FOH & Variance Analysis. Monthly fixed factory overhead consist of a
Department of Company are as follows:
Rs. Rs.
Supervision 1.200 Maintenance 500
Office supplies 20 Depreciation 2,000
Variable factory overhead costs are as follows:
Service 30 paisa per hour Vacation pay 20 paisa per hour
Idle time 01 paisa per hour Perishable tools 04 paisa per hour
Payroll taxes 10 paisa per hour Repairs 10 paisa per hour
Normal Capacity of the department is 10000 hours per month. Operations usually range between 9000
and 11000 hours.
Required: (a) Estimated factory overhead costs at 90%, 100% and 110% of Determine the budgeted
variance for a month when operations were at 110% of normal capacity. (b) Determine the volume
variance at cash of the above capacity levels capacity and the factory overhead costs were recorded as
follows:
Supervision Rs.1, 200 Office supplies RS 25
Service labor 3,700 Perishable tools 400
Idle time 100 Maintenance 500
Payroll taxes 1,120 Repairs 450
Vacation pay 2.200 Depreciation 2,000
Solution:
(a) Budgeted/Estimated Factory Overhead Costs
(1) At 90% of Normal Capacity Level.
90% of Normal Capacity Level = 10,000 x 90/100 = 9,000 hours
Fixed Factory Overhead cost (w-1) Rs. 3,720
Add Factory Overhead Cost
= Capacity level x Variable rate
= 9,000 hours x Rs.0.75 (-2) 6,750
Estimated Factory Overhead cost at 90% 10,470
(2) At 100% of Normal Capacity Level.
100% of Normal Capacity level = 10,000 * 100/100 = 10,000 hours
Fixed Factory Overhead cost 3,720
Add Variable Factory Overhead Cost
= Capacity level > Variable rate
= 10,000 hours x Rs.0.75 7,500
Estimated Factory Overhead cost at 100% 11.220
(3) At 110% of Normal Capacity level.
110% of Normal Capacity level = 10,000 x 110/100 = 11,000 hours
Fixed Factory Overhead cost Rs. 3,720
Add Variable Factory Overhead cost
= Capacity level Variable rate
= 11,000 hours * Rs.0.75 8,250
Estimated Factory Overhead cost at 110% 11,970
(b) Volume Variance
(1) At 90% of Normal Capacity level / Estimated Factory Overhead cost Rs.10,470
Applied Factory Overhead Cost Rate
= Capacity level * Applied FOH cost
=9,000 hours x Rs.1.122 (W-3) 10.098
Unfavorable Dr. 372
Applied Factory Overhead cost
(2) At 100% of Normal Capacity level
Estimated Factory Overhead cost (w-4) 11,220
Applied Factory Overhead cost
= 10,000 hours * Rs.1.122 11,220
Nill
(3) At 110% of Normal Capacity level.
Estimated Factory overhead cost 11,970
Applied Factory Overhead cost
= 11,000 hours x Rs.1.122 12,342
Favorable (Cr.) 372
Budgeted Variance at 110% of Normal Capacity level
Actual Factory Overhead cost Rs. 11,695
Estimated Factory Overhead cost at 110% 11,970
Favorable (Cr.) 372
Workings:
w- 1) Fixed Factory Overhead Cost
Supervision Rs. 1,200
Office Supplies 20
Maintenance 500
Depreciation 2,000
3,720
W-2) Variable Factory Overhead Rate per hour.
Supervise Labor 30 paisa per hour
Idle Time 1 paisa per hour
Payroll Taxes 10 paisa per hour 10 paisa per hour
Vacation Pay 20 paisa per hour
Perishable Pay 4 paisa per hour
Repairs 10 paisa per hour
3,720
(W-3) Applied FOH cost rate
Applied FOH cost rate = Estimated FOH cost of Normal capacity (100%) / Normal Capacity (100%)
= Rs.11, 220/10,000 hours
= Rs. 1.122 per hour.
(W-4) Actual Factory Overhead Cost
Supervision Rs. 1,200
Service labor Rs. 3700
Idle Time Rs. 100
Payroll Taxes Rs. 1,120
Vacation Pay Rs. 2,200
Office supplies Rs. 25
Perishable Tools Rs. 400
Repairs Rs. 450
Maintenance Rs. 500
Depreciation Rs. 2,000
11,695
Illustration 9-10: FOH Variance Analysis, Actual Activity of one month. Annual estimated factory
overhead of a Company for an expected volume of 180,000 pounds of product was as follows :-
Fixed overhead Rs. 36,000
Variable overhead Rs. 108,000
Output was 10,000 pounds in June and actual overhead expense was Rs. 7,700.
Required:
(i) The overhead applied rate per unit.
(ii) Budgeted variance.
(iii) Volume variance.
Solution:
1. Overhead Applied Rate per pound
Overhead Applied Rate per pound = Annual estimated FOH cost (Fixed FOH + Variable FOH) / Annual
Normal Capacity
= Rs.144.000 / 180.000 pounds
Rs.0.80 per pound.
2. Spending Variance
Actual FOH Cost Rs.7, 700
Budgeted/Estimated FOH cost for 10,000 pounds
Fixed FOH cost 36,000 / 12 Rs.3.000
Variable FOH Cost
10,000 pounds x Rs.0.60 (w-1) 6,000 9,000
Favorable 1300
3. Idle Capacity Variance
Budgeted Estimated FOH cost for 10,000 pounds Rs.9.000
Applied FOH Cost
= 10,000 pounds Rs.0.80 8,000
Unfavorable 1.000
Workings:
(W-1) Variable Factory Overhead Rate
= Estimated Variable FOH Cost / Normal Capacity= Rs.108, 000 / 180.000 pounds
= Rs.0.60 per pound

Illustration 9-11: Variance Analysis, Fixed FOH to be computed. A company provides following
data:
a) Factory overhead rate = Budgeted factory overhead - Budgeted Volume
= Rs. 84,000 - 5,250 units = Rs. 16 per unit.
b) = of the above calculated rate is variable cost oriented.
c) During the year the company produced 5,500 units.
d) Actual factory overhead expenditure were Rs. 85,800.
Required:
(1) Budgeted fixed factory overhead
(2) Under or over applied factory overhead
(3) Spending variance
(4) Idle capacity variance
Solution:
1. Budgeted Fixed Factory Overhead:
= Estimated total factory overhead - Estimated variable factory overhead
Rs. 84.000 - (Budgeted volume * Variable rate)
Rs. 84,000 – (5,250 x RS.16 * 2/8) = RS.84, 000 – RS. 21,000 = RS. 63,000
Total Variance
2. Under or over applied FOH RS.
Actual factory overhead 85,800
Applied factory overhead
= (Actual volume * Factory overhead applied rate)
= 5.500 hours * Rs. 16 88,500
under applied 2,200
3. Spending Variance RS.
Budgeted factory overhead for capacity attained
= Fixed factory overhead + (Actual volume * Variable rate)
= Rs. 63,000 + (5,500 units * Rs. 4) 85,000
Actual factory overhead 85,800
Unfavorable 800
(c)Idle Capacity Variance RS.
Applied factory overhead 88,000
Budgeted factory overhead for capacity attained 85,000
Favorable 3.000

Chapter 5 MATERIAL CONTROL – DETERMINING & MINIMIZING COSTS

Question no 11:
Illustration 5-1: Inventory levels. Two materials A and B are used as follows:
Minimum usage 50 units per week each.
Maximum usage 150units per week each.
Normal/Average usage 100 units per week cash
EOQ/Re-order quantity: A: 600 units B: 1,000 units
Delivery period: A: 4 to 6 weeks, B: 2 to 4 weeks.
Calculate various stock levels. (See Problem No.1 to 9)
Solution:
(1) Re-order level = Maximum consumption * Maximum re-order period or lead-time.
A = 150 x 6 = 900 units.
B = 150 x 4 = 600 units.
(1) Minimum Level = Reorder level – (Normal consumption * normal delivery period or lead time)

A - 900-(100 x 5) = 400 units

B = 600 - (100 x 3) =300 units.
Note: Normal Period A= 4 +6+2 = 5 B= 2+ 4+2= 3
(3)Maximum Level = Order level + EOQ – (Minimum consumption * Minimum delivery time)
A = 900+600 - (50 x 4) = 1,300 units
B = 600 + 1000 - (50 x 2) = 1,500 units
(4)Average stock level=1/2 (Minimum level +Maximum level)
A = (100+1300) - 850 units.
B = (30D +1500) = 900 units.
Illustration 5-3: Inventory Levels. From the following you are asked to compute:
a) Order Point b) Minimum Limit c) Maximum Limit d) Danger Limit
Average daily requirements 20 units
Time required for receipt 50 days
Economical order quantity 1000 units
Maximum daily consumption 30 units
Minimum daily consumption 10 units

Time to get Emergency supply 5 days

Solution:
(a) Order point = Maximum daily consumption * lead time.
= 30 units x 50 days
= 1,500 units
(b) Minimum limit = Order level - (Average daily requirement * lead time)
= 1,500 units - (20 units x 50 days)
= 1,500 units - 1,000 units
= 500 units
(c) Maximum limit = Order level + EOQ-(Minimum daily consumption * lead time)
= 1,500 units + 1,000 units -(10 units * 50 days)
= 1,500 units + 1,000 units - 500 units
= 2,000 units.
(d) Danger lever = Average daily requirement * Time to get emergency supply
= 20 units * 5 days
= 100 units
Illustration 5-4: Inventory Levels & EOQ. Medical Aids Co. manufactures a special
Product A. The following particulars were collected for the year 2003.
a) Monthly demand of A 1,000 of units.
b) Cost of placing an order Rs. 100
c) Annual carrying cost per unit. Rs. 15.
d) Normal usage 50 unit per week.
e) Minimum usage 25 units per week
f) Maximum usage 75 units per week
g) Rre-order period 4 to 6 weeks.
Compute from the above: (1) Re-order Quantity: (2) Re-order Level; (3) Minimum level;
Maximum Level; (5) average Stock Level. (See Problem No. 1 to 5)
Solution: 1: Re-order Quantity Or EOQ.
Where AR = Annual usage.
OC = Ordering cost
UC = Carrying cost per unit.
SC = Storage cost
EOQ = √ 2 x 2,600x100 / 15
= 186 units (Approx.)
Normal usage is 50 units per week. So, for one year it is 52 weeks x 50 = 2600 units
2. Re-order Level = Maximum usage x Maximum re-order period
= 75 x 6 = 450 units.
3. Minimum Level. = Re-order level - (Normal usage x Average re-order period)
= 450 - (50x5) = 200Units,
Average Time or Period= 4 + 6 + 2 = 5
4. = Maximum level = Re-order level + Re-order quantity -(Min. usage x Min. re-order
= 450+186-(25x4) =536 units.
5. Average Stock Level = Min. level +Maxi. Level +2
= 200 + 536 +2 = 368 Units.
Illustration 5-5: Inventory Levels & EOQ.The following information is available in the of a
component D 20:
Maximum Stock Level: 8400 units
Budgeted Consumption: ` Maximum 1500 units per month
Maximum 4 Months
Budgeted delivery Period: Minimum 800 units per month
Minimum 2 Months
Required: a) Re-order Level b) Re-order Quantity EQP
Solution:
(a) Re-order level = Maximum consumption * Maximum lead time
= 1,500 units x 4 months
= 6,000 units
(b) Maximum level = ordering level - (minimum requirement * minimum lead level)
+Economic order Quantity
8400 = 6000 – (800 x 2) + EOQ
8400 = 6000 – 16000 + EOQ
8400 - 6000 – 16000 = EOQ
EOQ = 4000 units
Illustration 5-8: EOQ. No. of Orders & Proof of EOQ.
Annual consumption = 12.000 units.
Cost of ordering = Rs.15 per order
Cost per material = Rs.1.25 per unit
Carrying cost = 20% of average inventory
Required: 1. Calculate EOQ 2. Calculate No. of orders needed per year
3. Give proof of EOQ as in requirement 1
Solution: EOQ= √2 x AR x OC/ CC
= √2 x 12.000 x 15 / 1.25 x 20%
= √ 2 x 12,000 x 15 / 0.25
, = √440,000 = 1,200 units
No. of order per year = Annual Requirement - EQO =12.000 / 1,200
= 10 orders
The following table may be prepared to determine the economic order quality:

Annual Size Orders No. of Order Ordering Cost Average Total

Requirement (2) (3) (4) Cost Cast(6)
(1) Carrying(5)
12,000 800 15 225 100 325
12,000 1000 12 180 125 305
12,000 1200 10 150 150 300
12,000 1400 8.57 128.55 175 303.55
12,000 1600 7.50 112.50 200 312.50
Column 3= Column 1 = Column 2
Column 4= Column 3 * Rs. 15 Ordering cost per order
Column 5=Order size = 2 * Carrying cost i...e 800 = 2 * 0.25=100
Column 6 = Column 4 + Column 5
The above table shows that 1200 units is the ideal size of the order because total cost at this level is the
least of all. This means the number of orders per year should be ten. Other order quantities (more or than
less than 1200. units), are not so economical because total cost is more than that of this level