; CA Final Group II_ May 1987 - Cost Management
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CA Final Group II_ May 1987 - Cost Management


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									Cost Academy                                                                                            1

                               CA Final Group II, May 1987
                          Paper 8: Cost Systems & Cost Control

Question 1
      Navyug Enterprises is considering the introduction of a new product. Generally, the company’s
      products have a life of about five years, after which they are usually dropped from the range of
      product the company sells.

       The new product envisages the purchase of new machinery costing Rs. 4,00,000 including
       freight and installation charges. The useful life of the equalization is five years with an estimated
       salvage value of Rs. 1,57,500 at the end of that time. The machine will be depreciated for tax
       purposes by the reducing balance method at a rate of 15% on the book value.

       The new product with the produced in a factory which is already owned by the company. The
       company built the factory some years ago at Rs. 1,50,000. The book value on the written down
       value basis is zero.

       Today the factory has a resale value of Rs. 3,50,000 which should remain fairly stable over the
       next five years. The factory is currently being rented to another company under a lease
       agreement, which has five years to run, and which provides for an annual rental of Rs. 5,000.
       Under the lease agreement, if the lessee wishes to cancel the lease, he can do so by paying the
       lessee compensation equal to one year’s rental payment. This amount is not deductible for
       income tax purposes.

       Additions to current assets will require Rs. 22,500 at the commencement of the proposal which, it
       is assumed, is fully recoverable at the end of year 5. The company will have to spend Rs. 50,000
       in year 1 towards markets research.

       The net cash inflows from operations before depreciation and income tax are:
                            Year                              Rs.
                               1                          2,00,000
                               2                          2,50,000
                               3                          3,25,000
                               4                          3,00,000
                               5                          1,50,000

       it may be assumed that all cash flows are received or paid at the end of each year and that
       income taxes are paid in the year in which the inflow occurred.

       The company’s tax rate may be assumed to be 50% and the company’s required return after tax
       is 10%.

       Required: Evaluate the proposal.

       Workings:                                                                 Rs.
       1. Initial Cash outflows:
          Cost of new machinery                                              4,00,000
          Cancellation of Lease                                                 5,000
          Working capital                                                      22,500
                             Total cash outflow                              4,27,500

       2. Market research outlay:
          outlay                                                               50,000
Cost Academy                                                                                          2

           Less: Tax saving at 50%                                          25,000
                  Net outlay to be recognized in year 1                     25,000

      3. Opportunity cost i.e. rent of factory foregone on
         lease rent                                                             5,000
         Less: Tax at 50%                                                       2,500

      Net cash outflow of Rs. 2,500 is to be recognized each year for years 1 to 5.

      4. Depreciation @ 15% by the reducing balance method;
         year                 Book value               Depreciation
                                   Rs.                      Rs.
           1                   4,00,000                  60,000
           2                   3,40,000                  51,000
           3                   2,89,000                  43,350
           4                   2,49,650                  36,848
           5                   2,08,802                  31,320

      5. Computation of Net cash inflows from operations:
         Cash inflows = (Operating cash inflows before depreciation and tax –Depreciation)  (1- Tax
                                                                              Rate) +Depreciation

             1        (Rs. 2,00,000- Rs. 60,000) (1-0.5) +Rs. 60,000 = Rs. 1,30,000
             2        (Rs. 2,50,000- Rs. 51,000) (1-0.50) + Rs. 51,000 = Rs. 1,50,500
             3        (Rs. 3,25,000-Rs. 43,350) (1-0.50)+ Rs. 43,350 = Rs. 1,84,175
             4        (Rs. 3,00,000- Rs. 36,848) (1-0.5) + Rs. 36,848 = Rs. 1,68,420
             5        (Rs. 1,50,000- Rs. 31,320)(1-0.5)+ Rs. 31,320 = Rs. 90,660

      6. Sales of machinery                                                  Rs.
         Book Value (Rs. 2,08,802 –Rs. 31,320)                           1,77,482
         Less: Sales value                                               1,57,500
         Loss on sale of machinery                                         19,982
         Tax saving at 50%                                                 9,9991

      Therefore cash inflow in the 5th Year on this account to be recognized:
         Rs. 1,57,500+ Rs. 9,991 = Rs. 1,67,491

      7. Amount of Working Capital of Rs. 22,500 will be shown as inflow in year 5

                           Computation of Net present value to Evaluate the proposal
      Year               Cash Flows                      Net Cash          Present          Present
                     Cash out      Cash in                 flows          value factor       value
                                                                            At 10%
       1                 2           3                        4                5                6
                        Rs.         Rs.                      Rs.                               Rs.
       0           4,27,500                           (4,27,500)            1,000        (4,27,500)
       1             25,000
                      2,500     1,30,000                1,02,500            0.909           93,173
       2              2,500     1,50,500                1,48,000            0.826         1,22,248
       3              2,500     1,84,175                1,81,675            0.751         1,36,438
       4              2,500     1,68,424                1,65,924            0.683         1,13,326
       5              2,500       90,660
                                1,67,491                2,78,151            0.621         1,72,732
                                  22,500                                                 ________
                     Net Present Value                                                    2,10,417
Cost Academy                                                                                      3

        Note: Figures in brackets indicate cash outflows.
        Recommendation: Since the net present value (Rs. 2,10,417) of the above proposal is positive,
        the company should introduce the new product.

Question 2
      At the beginning of February 1987 the opening balances in the cost ledger of Good Luck Ltd.
          Stores Ledger Control A/C                    3,64,000
          WIP Control A/c                              2,30,000
          Finished Goods Control A/c                   1,57,000
          Cost Ledger Control A/c                      7,51,000

      During February 1987 the following transactions took place:
         Material purchased                               2,87,000
         Materials issued to:
         Production                                       2,13,000
         Service Departments                                42,000
         The construction of manufacturing equipment        56,000

          Gross factory wages paid (of these wages,
          Rs. 66,000 was incurred in the construction of
          Manufacturing equipment and the balance
          Was direct wages)                                5,89,000

          Production overheads incurred (excluding
          The items shown above)                            19,700

          Production overheads absorbed in
          Construction of manufacturing equipment           35,300

          Unabsorbed production overhead in
          February 1987                                     40,000

          Raw Material stocks damaged and Written off       12,000

          Selling overheads incurred and charged to
          Cost of sales                                    1,05,000
          Sales                                            8,80,000

          The company’s gross profit margin is 15%
          On factory cost.

          Royalty payments for manufacture of
          Product EXE under licences                         3,000

      At the end of February 1987, stocks of work in progress were Rs. 76,400 higher than at the
      beginning of the month. The equipment under construction was complete on 25th February and
      transferred out of the cost ledger at the end of the month.

      Required: Prepare the Control Account and Costing profit & Loss Account which would show the
      effect of these transactions in February 1987.
Cost Academy                                                                                       4

       Dr.                                   Cost Ledger Control A/C                       Cr.
                                                  Rs.                                     Rs.
       To Capital Equipment A/c              1,58,300 By Balance b/d                  7,51,000
       To Sales                              8,80,000 By Stores Ledger Control A/c 2,87,000
       To Balance c/d                        7,35,400 By Factory wages control A/c 5,89,000
                                                       By Product overhead control A/c 19,700
                                                       By Selling ovh. control A/c    1,05,000
                                                       By WIP Control A/c (Royalty)      3,000
                                            ________ By Costing P & L A/c            __19,000
                                            17,73,700                               17,73,700

       Dr.                               Stores Ledger Control A/c                  Cr.
                                                  Rs.                                     Rs.
       To Balance b/d                        3,64,000 By WIP control A/c              2,13,000
       To Cost Ledger Control A/c            2,87,000 By Production overheads
                                                           Control A/c                  42,000
                                                       By Capital Equipment A/c         56,000
                                                       By Costing Profit & Loss A/c
                                                          (Stock written off)           12,000
                                          _________ By Balance c/d                    3,28,000
                                             6,51,000                                 6,51,000

       Dr.                          Factory Wages Control A/c                               Cr.
                                                  Rs.                                      Rs.
       To Cost Ledger Control A/c            5,89,000 By WIP Control A/c               3,28,000
          (Gross Wages)                                    (Bal. Figure)
                                                       By Production oveh. control     1,95,000
                                           _________ By Capital Equipment A/c          3,28,000
                                             5,89,000                                  5,89,000

       Dr.                           Production overhead Control A/c                       Cr.
                                                    Rs.                                     Rs.
       To Stores Ledger control A/c              42,000 By unabsorbed production
                                                           Overheads A/c                  40,000
       To Factory Wages Control a/c            1,95,000 By Capital Equipment A/c          36,300
       To Cost Ledger Control A/c (other cost) __19,700 By WIP control A/c (bal figure) 1,80,400
                                               2,56,700                                 2,56,700

       Dr.                               WIP Control A/c                                  Cr.
                                                  Rs.                                    Rs.
       To Balance b/d                        2,30,000 By Finished goods control A/c
       To Stores Ledger Control A/c          2,13,000 By (balancing figure)          6,48,000
       To Factory wages control A/c          3,28,000 By Balance c/d
       To Production overheads control A/c   1,80,400    (Rs. 2,30,000+Rs. 76,400) 3,06,400
       To Cost Ledger control A/c               3,000
          (Royalty)                         ________                               _________
                                             9,54,400                                9,54,400

       Dr.                          Capital Equipment (under Construction) A/c              Cr.
                                                   Rs.                                     Rs.
       To Stores Ledger Control A/c             56,000 By cost Ledger Control A/c      1,58,300
       To Factory Wages Control A/c             66,000
       To Production overheads control a/c      36,300                                ________
                                              1,58,300                                 1,58,300
Cost Academy                                                                                               5

       Dr.                                   Finished Goods Control A/c                            Cr.
       To Balance b/d                            1,57,000 By Cost of Sales A/c               7,04,000
       To WIP Control A/c                        6,48,000 (80% of Rs. 8,80,000)
                                                ________ By Balance c/d                      1,01,000
                                                 8,05,000                                    8,05,000

       Dr.                                   Selling overheads Control A/c                         Cr.
       To Cost Ledger Control A/c                 1,05,000 Cost of Sales A/c                 1,05,000
                                               ________                                     ________
                                                  1,05,000                                   1,05,000

       Dr.                                   Cost of Sales A/c                                     Cr.
       To Finished goods control A/c            7,04,000 Costing Profit & Loss A/c           8,09,000
       To Selling overhead control A/c          1,05,000                                    ________
                                                8,09,000                                     8,09,000

       Dr.                                          Sales A/                                       Cr.
       Costing profit & Loss A/c                8,80,000 Cost Ledger Control A/c             6,80,000

                                  Unabsorbed Production overheads A/c
       Production overheads control A/c      40,000 Costing profit & Loss A/c                     40,000

        Dr.                                   Costing Profit & Loss A/c                            Cr.
       To Cost of Sales A/c                     8,09,000 Sales A/c                           8,80,000
       To Unabsorbed production ovh. A/c          40,000
       To Store Ledger Control a/c                12,000
          (Stock Written off)
       To Cost Ledger control A/c (Profit)        19,000                                    ________
                                                8,80,000                                     8,80,000

                                              Trial Balance (not required)
                                                                     Dr.                      Cr.
                                                                     Rs.                      Rs.
       Cost Ledger Control A/c                                                           7,35,400
       Stores Ledger Control A/c                                 3,28,000
       WIP Control A/c                                           3,06,400
       Finished goods control A/c                                1,01,000              ________
                                                                 7,35,400               7,35,400

Question 3
      Gemini Publishers Ltd. is considering launching a new monthly magazine at a selling price of Rs.
      10 per copy. Sales of the magazine are expected to be 5,00,000 copies per month, but it is
      possible that the actual sales could differ quite significantly from this estimate.

       Two different methods of producing the magazine are being considered and neither would
       involve any additional capital expenditure. The estimated production cost for each of the two
       methods of manufacture, together with the additional marketing and distribution costs of selling
       the new magazine, are given below:

                                                    Method A                         Method B
       Variable costs                          Rs. 5.50 per copy              Rs. 5.00 per copy
       Specific Fixed costs                    Rs. 8,00,000 p.m              Rs. 12,00,000 p.m.
Cost Academy                                                                                             6

       Semi-variable costs:
       The following estimates have been available:
       3,50,000 copies                      Rs. 5,50,000 p.m.                  Rs. 4,75,000 p.m.
       4,50,000 copies                      Rs. 6,50,000 p.m.                  Rs. 5,25,000 p.m.

       It may be assumed that the fixed cost content of the semi-variable cost will remain constant
       throughout the range of activity shown.

       The company currently sells a magazine covering related topics to those that will be included in
       the new publication, and consequently, it is anticipated that sales of this existing magazine will be
       adversely affected. It is estimated that for every ten copies sold of the new publication, sales of
       the existing magazines will be reduced by one copy.

       Sales and cost data of the existing magazines are as shown below:
           Sales                                          Rs. 2,20,000 copies per month
           Selling price                                  Rs. 8.50 per copy
           Variable costs                                 Rs. 3.50 per copy
           Specific fixed costs                           Rs. 8,00,000 per month

       (a) Calculate, for each production the net increase in company profits which will result from the
           introduction of the new magazine, at each of the following levels of activity:
                    5,00,000                              copies per month
                    4,00,000                              copies per month
                    6,00,000                              copies per month

       (b) Calculate, for each production method, the amount by which sales volume of the new
           magazine could decline from the anticipated 5,00,000 copies per month, before the
           company makes an additional profit from the introduction of the new publication.

       (c)   Briefly identify any conclusions which may be drawn from your calculation.

       1. Analysis of Semi-variable costs:
           Method A:

             Variable Element       = Increase in cost Increase in Activity
                                    = Rs. 1,00,0001,00,000 copies
                                    = Re. 1 per copy

             Fixed Element          = Total Semi-variable cost- variable costs at an activity level of
                                                                                    3,50,000 copies
                                    = Rs. 5,50,000- Rs. 3,50,000
                                    = Rs. 2,00,000

             Method B:
             Variable Element       = Increase in Costs Increase in Activity
                                    = Rs. 50,0001,00,000 copies
                                    = Re. 0.50 per copy

             Fixed Element          = Total Semi-variable costs- Variable costs at an activity level of
                                                                                       3,50,000 copies
                                    = Rs. 4,75,000- Rs. 1,75,000
                                    = Rs. 3,00,000
Cost Academy                                                                                       7

      The analysis is based on a comparison of total costs and activity levels at 3,50,000 and 4,50,000
      copies per month respectively.

      2.   Total Fixed costs:
           Method A:                                                        Rs.
           Specific fixed costs                                         8,00,000
           Add: Fixed element in Semi-variable costs                    2,00,000
                             Total                                     10,00,000

           Method B:                                                       Rs.
           Specific fixed costs                                        12,00,000
           Add: Fixed element in Semi-variable costs                  __3,00,000
                             Total                                     15,00,000

      3.   Contribution per copy of New Magazine
                                                         Method A                    Method B
                                                           Rs.                         Rs.
           Selling price                                  10.00                       10.00
           Variables cost (given)                          5.50                        5.00
           Variable element of semi-variable costs         1.00                        0.50
           Lost contribution from existing magazine
           (on 10 new copies Rs. 5 will be lost)             __0.50                  __0.50
           Total Variable costs:                               7.00                    6.00
           Contribution                                        3.00                    4.00

(a)   Calculation of net increase in company profits
      Method A                                                  Levels Activity
      Copies sold                              5,00,000                4,00,000         6,00,000
                                                    Rs.                   Rs.               Rs.
      Contribution per copy                     __3.00                __3.00             __3.00
      Total contribution                     15,00,000             12,00,000          18,00,000
      Less: Total fixed costs                10,00,000             10,00,000          10,00,000
      Net increase in profit                  5,00,000              2,00,000           8,00,000

      Method B:                                                  Level of Activity
      Copies sold                                 5,00,000          4,00,000           6,00,000
                                                      Rs.               Rs.                Rs.
      Contribution per copy                         __4.00            __4.00            ___4.00
      Total contribution                         20,00,000         16,00,000          24,00,000
      Less: Total Fixed costs                    15,00,000         15,00,000          15,00,000
      Net increase in profit                      5,00,000          1,00,000           9,00,000

(b)   Break even Point = Fixed cost contribution per unit

      Method A = Rs. 10,00,000 Rs. 3 =3,33,333 copies

      Method B = Rs. 15,00,000 Rs. 4 = 3,75,000 copies

      The margin of safety or the amount by which sales volume of the new magazine could decline is
      the difference between the anticipated sales and the breakeven point sales. This is calculated
           Method A:                             = 5,00,000 –3,33,3333
                                                 = 1,66,667 copies

           Method B:                              = 5,00,000- 3,75,000
                                                  = 1,25,000 copies
Cost Academy                                                                                        8

(c)    The above calculations show that Method B has a higher breakeven point and a higher
       contribution per copy sold. Therefore, profits from method B are more vulnerable to a decline in
       sales volume. However, higher profits are obtained with method B (see 6,00,000 copies in (a)).

       The contribution per copy of the existing magazine is Rs. 5. therefore, the breakeven point from
       the sales of the existing magazines is

            Rs. 8,00,000Rs. 5.00 = 1,60,000 copies

       The current level of monthly sales is 2,20,000 copies. Therefore, sales can drop by 60,000
       copies before breakeven point is reached. For every 10 copies sold of the new magazine, sales
       of the existing magazine will be reduced by one copy. Consequently, if more than 6,00,000
       copies of the new magazine are sold, the existing magazine will make a loss. Therefore, if the
       sales of the new magazine are expected to consistently exceed 6,00,000 copies, then the
       viability of the existing magazine must be questioned.

Question 4
      Jumbo Enterprises manufactures one product, and the entire product is sold as soon as it is
      produced. There are no opening or closing stocks and work in progress is negligible. The
      company operates a standard costing system and analysis of variances is made every month.
      The standard cost card for the product is as follows:
           Direct material                  0.5 kgs at Rs. 4 per kg.          2.00
           Direct Wages                     2 hrs. at Rs. 2 per hour          4.00
           Variable overheads               2 hrs at Rs. 0.30 per hour        0.60
           Fixed overheads                  2 hours at Rs. 3.70 per hour  ___7.40
           Standard cost                                                    14.00
           Standard profit                                                 __6.00
           Standard selling price                                         __20.00

       Selling & administration expenses are not included in the standard cost and are deducted from
       profit as a period cost.

       Budgeted output for April 1987 was 5,100 units.

       Actual results for April 1987 were as follows:

       Production of 4,850 units was sold for Rs. 95,600.
       Materials consumed in production amounted to 2,300 kgs. At a total cost of 9,800.

       Labour hours paid for amounted to 8,500 hours at a cost of Rs. 16,800.
       Actual operating hours amounted to 8,000 hours.
       Variable overheads amounted to Rs. 2,600.

       Fixed overheads amounted to Rs. 42,300
       Selling and administrated expenses amounted to Rs. 18,000.

       You are required to
       a) Calculate all variances.
       b) Prepare an operating statement for the month ended 30th April 1987.

(a)    Calculation of Variances:
       (i) Material price variance: Actual quantity (Standard rate – Actual rate)
           = Rs. 9,200 –Rs. 9,800 = Rs. 600 (A)
Cost Academy                                                                               9

      (ii)   Material usage variance: Standard rate (Standard quantity –Actual quantity)
             = Rs. 4(2,425 kg.- 2,300 kg) = Rs. 500 (F)

      (iii) Labour Rate variance: Actual hours (Standard rate- Actual rate)
            = Rs. 17,000- Rs. 16,800 = Rs. 200 (F)

      (iv) Labour efficiency variance: Standard rate (Standard hours- Actual hours)
           = Rs. 2(9,700- 8,000) = Rs. 3,400 (F)

      (v)    Labour idle time variance: Standard rate  Idle time
             = Rs. 2500 hours = Rs. 1,000 (A)

      (vi) Variable overheads expenditure variance:
           = Budgeted variable overheads –Actual variable overheads
           = (8,000 hours Rs. 0.30) –Rs. 2,600
           = Rs. 200 (A)

      (vii) Variable overheads efficiency variance:
            = Standard rate (Standard hours – Actual hours)
            = Rs. 0.30 (9,700- 8,000)
            = Rs. 510 (F)

      (viii) Fixed overheads expenditure variance:
             = Budgeted fixed overheads –Actual fixed overheads
             = (5,100 units Rs. 7.40) – Rs. 42,300 = Rs. 4,560 (A)

      (ix) Fixed overheads volume variance:
           = Budgeted fixed overheads per unit (Budgeted volume –Actual volume)
           = Rs. 7.40 (5,100- 4,850)
           = Rs. 1,850 (A)

      (x)    Fixed overheads efficiency variance:
             = Budgeted fixed overheads per hour (Std. Hours –Actual hours)
             = Rs. 3.70 (9,700- 8,000)
             = Rs. 6,290 (F)

      (xi) Fixed overhead capacity variance:
           = Budgeted fixed overheads per hour (Budgeted capacity- Actual capacity)
           = Rs. 3.70 (5,1002)- 8,000)
           = Rs. 8,140 (A)

      (xii) Sales price variance:
            = Actual Qty. (Budgeted rate –Actual rate)
            = Rs. 97,000- Rs. 95,000
            = Rs. 1,400 (A)

      (xiii) Sales volume variance:
             = Standard profit per unit (Budgeted sales volume- Actual sales volume)
             = Rs. 6 (5,100-4,850)
             = Rs. 1,500 (A)

(b)   Operating statement for the month ended 30th April 1987
                                                            Rs.                 Rs.
      Budgeted profit before selling & Administration
      Expenses (5,100 unitsRs. 5)                                            30,600

      Sales Variances
Cost Academy                                                                                          10

          Price                                          1,400 (A)
          Volume                                         1,500 (A)     2,900 (A)
      Actual sales minus Standard cost of sales                          27,700

      Cost Variances:                                            F            A
                                                               Rs.          Rs.
      Material Price                                             --         600
      Material usage                                           500            --
      Labour Rate                                              200            --
      Labour efficiency                                      3,400            --
      Labour idle time                                           --       1,000
      Variable overheads expenditure                             --         200
      Variable overheads efficiency                            510            --
      Fixed overheads expenditure                                --       4,560
      Fixed overheads efficiency                             6,290            --
      Fixed overheads capacity                                   --       8,140
                                                        ________      ________
                                                           10,900        14,500           3,600 (A)
      Actual profit before selling & Administration expenses                                24,100
      Selling & Administration Expenses                                                   __18,000
      Actual profit for the month                                                          __6,100

      Check: (not required)
                                                                Rs.                 Rs.
      Sales                                                                      95,600
      Less: Cost of Materials                                 9,800
            Labour                                           16,800
            Variable overheads                                2,600
            Fixed overheads                                  42,300
            Selling & Administration Exp.                    18,000              89,500
      Net profit                                                                __6,100


Question 5
      ACE Ltd. manufactures three products A, C and E in two production departments F and G, in
      each of which are employed two grades of labour. The cost accountant is preparing the annual
      budgets for the next year and he has asked you to prepare, using the data given below:

      a)   The production budget in units for products A, C and E.
      b)   The direct wages budget for departments F and G with the labour costs of product A, C and
           E and total shown separately:

      Product: (Rs. ‘000)                                   A               C                 E
      Finished Stocks:
          Budgeted stocks are
              1st Jan. next year                          720            540              1360
              31st Dec. Next year                         600            570              1,000

      All stocks are valued at standard cost per unit Rs. 24           Rs. 15             Rs. 30
Cost Academy                                                                                 11

      Standard profit:
         Calculated as percentage of
         Selling price                                  20%            25%      16 ½ %
                                   Total             Product A      Product C   Product E
                                  (Rs. ‘000)          (Rs. ‘000)   (Rs. ‘000)   (Rs. ‘000)
      Budgeted Sales are:
         South                     6,600               1,200         1,800       3,600
         West                      5,100               1,500         1,200       2,400
         North                     6,380              _1,500        __800        4,080
                                  18,080               4,200         3,800      10,080

      Normal loss in production
      Standard labour times per
      Unit and standard rates per hour                  10%           20%           5%

                                         Rate         Product       Product C   Product B
                                          Rs.         Hours         hours        hours
                                                       p.u.           p.u         p.u

      Department F:
         Grade 1                         1.80            2.0             3.0        1.0
         Grade 2                         1.60            1.5             2.0        1.5

      Department G:
         Grade 1                         2.00            3.0             1.0        1.0
         Grade 2                         1.80            2.0             1.5        2.5

       i) Unit selling price:
          A: Rs. 24(10080) = Rs. 30
          C: Rs. 15 (10075) = Rs. 20
          E: Rs. 20(10082.380 = Rs. 24

      ii)   Budgeted Sales volume (in ‘000):
            A: Rs. 4,200Rs. 30 = 140
            C: Rs. 3,800Rs. 20 = 190
            E: Rs. 10,080Rs. 24 = 420

      iii) Stock increases/(decrease) (‘000 units)
           A: {(Rs. 720-600) Rs. 24} = (5)
           B: {(Rs. 540-570)Rs. 15} = 2
           C: {Rs. (1,800-1,000) Rs. 20} = (40)

      iv) Budgeted Good production (‘000 units):
          A: 140 –5 = 135
          B: 190+2 = 192
          C: 420-40 = 380

      v) Normal Loss in production (‘000 units)
         A: 135(1090) = 15
         C: 192 (2080) = 48
         E: 380595 = 20
Cost Academy                                                                                          12

(a)    Production Budget in units for Product A, C and E
       Product (‘000 units)                                       A             C                E
       Sales volume                                              140           190             420
       Stock increase (decrease)                                __(5)          __2           __(40)
       Saleable output produced                                  135           192             380
       Normal loss in production                               ___15          __48            __20
       Input to production                                       150           240             400

(b)    Direct wages Budget for Departments F & G (With Labour costs of products A, C & E &
       Product:                       A                C                E            Total
                                  Std. Rs. ‘000 Std.     Rs. ‘000   Std. Rs. ‘000 Rs. ‘000
                                 Hrs.             hrs.              hrs.

       Department F.
       Grade 1
       @ Rs. 1.80/hr.                300        540    720        1296     400        720      2,556

       Grade 2
       @ Rs. 1.60/hr.                225        360    480       __768     600         960     2,088
       Total A                                  900               2,064              1,680     4,644

       Department G:
       Grade 1
       @ Rs. 2/hr.                   450        900    240         480     400        800      2,180

       Grade 2
       @ Rs. 1.80/hr.                300      _540     360       __648 1,000         1,800     2,988
           Total (B)                          1,440               1,128              2,600     5,168

       Total Direct wages (A+B)               2,340               3,192              4,280     9,812

Question 6
(a)   Describe briefly what you understand by the terms:
      i) Integrated Cost accounts
      ii) Investment center

(b)    Tabulate the advantages of integrated cost accounts.

(a)  (i) Integrated Cost Accounts
     Generally a separate set of books is kept for cost accounts and for financial accounts. However,
     when both cost and financial accounts are kept together in the same set of books, the system of
     cost accounting is known as integrated cost accounts. In other words, in integrated cost
     accounts, financial and cost accounting transactions are recorded in one combine ledger. The
     essential feature of an integrated cost accounts systems is that this system records, besides
     internal costing transactions, financial items also not normally required for cost accounting. For
     example in integrated system, accounts for capital expenditure, sundry creditors and debtors,
     share capital, cash and bank transactions and pre-payments and accruals are also opened,
     along with various cost ledger accounts.

       (ii) Investment Center
       Investment center is a segment of responsibility accounting which deals with costs, revenue and
       investment. In fact, an investment center is a step further from profit center. Its success is
       measured not only by its income but also by relating that income to the invested capital. In
Cost Academy                                                                                          13

      practice, the term investment center is not widely used. Instead, profit center is used
      indiscriminately to describe segments that are always assigned responsibility for revenue and
      expenses, but may or may not be assigned responsibility for the related invested capital.

      The manager of an investment center is accountable for production and marketing decisions
      along with investment decision. He is concerned with both how operations are carried out and
      what operations are carried out. For measuring the performance of an investment center the ratio
      of operating income to investment (ROI) is used.

(b)   Advantages of Integrated Cost Accounts
      The following are the advantages of integrated cost accounts:

      i)   The need for separate set of financial and cost accounts ledgers is eliminated. Consequently
           the necessity for the reconciliation between the profit shown by costing profit and loss
           account and financial profit and loss account does not arise. This saves clerical time and

      ii) There is an automatic check on the correctness of the cost data and this ensures that all
          legitimate expenditures have been included in the cost accounts.

      iii) Fewer accounts and records are required and thus duplication in accounting and analysis is

      iv) In integrated cost accounts entries are posted straight from the books of original entry.
          Therefore, there is no delay in obtaining cost data.

      v) This system also has a psychological advantage. It shows the cost and financial accounts are
         complementary and there is no need to consider them as two separate watertight

      vi) Since the system is generally centralized, it results in economy.

      vii) The knowledge of financial and cost accounting may be pooled together.

      viii) Integrated cost accounts system widens the outlook of the accountant and his staff. They are
            placed in a better position to appreciate the entire accounting system in its totality. In
            integrated cost accounts system, there is no need to open a cost ledger control account. It is
            possible to post each transaction on double entry basis without the necessity for opening a
            balancing account.

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