# costing_problems_1_

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```					CHAPTER – 1                    COST - SHEET

Q.No.1) The following extract of costing information relate to commodity A for the
year 31.3.02007
Purchase of Raw Material                            Rs.48,000
Direct Wages                                        Rs.48,000

Stock on 1-4-2006
Of Raw Material                                     Rs.8,000
Of finished Goods 1,600 quintals                    Rs.6,400

Stock on 31-3-2007
Of Raw Material                                     Rs.6,800
Of finished Goods 3,200 quintals
Work on cost ( factory overhead )                   Rs.16,800

Work – in – progress
1 st April 2006                                     Rs.1,920
31 st March 2007                                    Rs.6,400
Sales (Finished Product )                           Rs.1,20,000

Advertising, Discount allowed and selling cost is Re.0.40 per quintal. During the year
25,600 Quintals of commodity were produced. Prepare cost sheet.

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Q.2     Prepare a cost sheet showing the cost per tonne of paper manufactured by
Bhadrachalam Paper mills in January, 2007 under the different element cost.
Paper mills in January, 2007 under the different element cost.
Direct Materials :
(i ) Paper Pulps                                     1,000 tons at Rs.80 per ton
(ii)Other Miscellaneous materials                    200 tons at Rs.50 per ton
Direct Labour :
220 skilled men for 25 days                          at Rs.6 per day
110 unskilled men for 25 days                        at Rs.4 per day
Direct Expenses:
Special Equipment hire charges                       Rs.10000
Specials Dyes
Variable                                             at 100 per cent on wages
Fixed                                                at 50 per cent on wages
Selling and Distribution Overheads                     at 20 per cent on works cost
Finished Paper Manufactured                            1000 tons
Sales of Waste                                         Rs.2,000
Sales                                                  Rs.400 per ton

Q.3. A factory can produce 60,000 units per annum at its optimum (100%) capacity.
The estimated cost of production is as under:
Direct Materials        :         Rs.3 per unit
Direct Labour              :      Rs.2 per unit
Indirect Expenses:
Fixed                   : Rs.1,50,000 per annum
Variable                : Rs.5 per unit
Semi – variable         : Rs.50,000 per annum up to 50% capacity and an
Extra expense of Rs.10,000 for every 25% increase in
capacity or part thereof.

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The factory produces only against orders and not for own stock. If the
production program of the factory is as indicated below, and the management
desires to ensure a profit of Rs.1,00,000 for the year, work out the average
selling price at which each unit should be quoted.
First 3 months of the year : 50% of capacity.
Remaining 9 months           : 80% of capacity

Q.4. A factory manufactures a uniform type of article and has a capacity of 4,000
units per week. The following information shows the different elements of cost for
three consecutive weeks when the output per week was as below:

Units               Direct              Direct      labour    Factory overheads
produced            materials (Rs)      (Rs)                  (Partly     variable    &
partly fixed )

2,000              12,000                 6,000                       12,500
2,800              16,800                 8,400                       16,500
3,700              22,200               11,100                        21,000

The factory has received an order for 5,000 units and is desires a profit of 16-23%
on selling price. Find out the price at which each unit should be sold.

Q.5) M/S bata shoe Co. manufactures two types of shoes A and B production costs
or the year ended 31st March, 2009 was:
Direct Materials             : Rs.15,00,000
Direct Wages                 : Rs.8,40,000
There was no work-in-progress at the beginning or at the end of the year.
It is ascertained that:
Direct Material in type A shoes consists twice as much as that in type B shoes.
The direct wages for type B shoes were 60 % of those for type a shoed.

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Production Overheads was the same per pair of A and B type.
Production during the year were :
Type A 40,000 pairs of which 36,000 were sold.
Type B 1,20,000 pairs of which 1,00,000 were sold.
Selling cost was Rs.1.50 per pair.
Selling price was Rs.44 for type A and Rs.28 per pair for type B.
Prepare a statement Showing cost and profit.

Q.6 The cost structure of an article, the selling price of which is Rs.45,000 is as
follow:
Direct Materials                        50%
Direct Labour                           20%

An increase of 15% in the cost materials and of 25% in the cost of labour is
anticipated These increased costs in relation to the present selling price would cause
a 25% decrease in the amount of present profit per article

You are required:
1.) To prepare a statement of profit per article at present, and
2.) The revised selling price to produce the same percentage of profit to sales as
before.

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Chapter -2:                        ACTIVITY BASED COSTING

Q.1. A company products three products A, B and C for which the standard costs
And quantities per unit are as follows:

Products                        A           B              C
Quantity produced                     10,000        20,000          30,000
Direct materials / p.u. (Rs.)                  50       40                30
Direct labour / p.u. (Rs.)                     30       40                50
Labour hours / p.u.                             3          4               5
Machine hours / p.u.                            4          4               7
No. of purchase requisitions              1,200      1,800           2,000
No. of set ups                             240         260             300
Department 1 = Rs. 10, 40,000
Department 2 = Rs. 15,84,000
Department 1 is labour intensive and Department 2 is machine intensive.
Production scheduling / machine set up            Rs.12, 24,000
Receiving / inspecting                            Rs. 14,00,000
Rs. 26,24,000
Number of batches received / inspected = 5,000
Number of batches for scheduling and set –up = 800
You are required to:
(i) Prepare product cost statement under traditional Absorption Costing and
activity Based costing method.
(ii) Compare the results under two methods.

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Q.2. A company produces four products viz, P, Q, R and S. the data relating to
production activities are as under:
Product    Quantity of      Material        Direct       Machine               Direct Labour
Production       Cost        /   labour       Hours / unit          Cost / unit Rs.
unit            Hours/unit
P           1,000               10            1                0.50                     6
Q          10,000               10            1                0.50                     6
R           1,200               32            4                2.00                    24
S          14,000               34            3                3.00                    18

(i) Overheads applicable to machine oriented activity: Rs. 1,49,700
(ii) Overheads relating to ordering materials: Rs.7,680
(iii) Set up costs: Rs.17,400
(v) Materials handling costs: Rs.30,294
The following further information has been compiled:
Product    Number of             Number of           Number             of   Number           of
Set ups               Materials           times                   spare
orders              Materials                  Parts
handled
P               3                     3                    6                       6
Q              18                    12                30                     15
R               5                     3                    9                       3
S              24                    12                36                     12
Required:
(i) Select a suitable cost diver for each item of overheads expense and calculate the
cost per unit of cost driver.
(ii) Using the concept of activity based costing, computer the factory cost per unit of
each product.

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Q.3. Your Company decides to implement activity based costing (ABC) to the four
products currently made and sold by them. Details of the four products and relevant
information are given below for one period:
Products                         A              B          C                   D
Output in units                          120           100            80             120
Cost per unit :
Direct Materials                      Rs. 40         Rs. 50     Rs. 30             Rs. 60
Direct Labor                          Rs. 28         Rs. 21     Rs. 14             Rs. 21
Machine hours (per unit )                   4              3           3                  3
The four products are similar and are usually produced in production runs of 20
units and sold in batches of 10 units.
The production overheads are currently absorbed by using a machine hour rate, and
the total of the production overhead for the period has been analyzed as follows:
Rs.
Machine department                                                  10,430
(rent, business, rates, depreciation and supervision )
Set-up costs                                                            5,250
Stores receiving                                                        3,600
Inspection / Quality control                                            2,100
Materials handling and dispatch                                         4,620
You have ascertained that the “cost drivers” to be used are as listed below for the
Cost                                        Cost Driver
Set- up costs                               Number of production runs
Stores receiving                            Requisitions raised
Inspection /Quality control                 Number of production runs
Materials handling and dispatch             Orders executed
The Number of requisitions raised on the stores was 20 for each product and the
number of orders executed was 42, each order being for a batch of 10 of a product.
You are required to calculate the factory cost per unit of each product under Activity
Based costing.

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Q. 6.    Family store wants information about the profitability of individual product
lines:
Soft drinks, Fresh produce and packaged food. Family store provides the following
data for the year 2005-06 for each product line:
Soft drinks         Fresh             Packaged
produce           food

Revenues                                    Rs.7,93,500        Rs.21,00,600        Rs.12,09,900
Cost of goods sold                          Rs.6,00,000        Rs.15,00,000         Rs.9,00,000
Cost of bottles returned                        Rs.12,000               Rs.0                 Rs.0
Number of purchase orders placed                     360                840                  360
Number of deliveries received                        300               2,190                 660
Hours of shelf-Stocking time                         540               5,400               2,700
Items sold                                       1,26,000        11,04,000               3,06,000
Family store also provides the following information for the year 2005-2006
Activity       Description of Activity             Total cost     Cost-allocation Base
Bottles        Returning of empty bottles to       Rs.12,000      Direct tracing to soft-drink
returns        store                                              line
Ordering       Placing of orders for purchases     Rs.1,56,000    1,560 purchase orders
Delivery       Physical delivery and receipt of    Rs.2,52,000    3,150 deliveries
Goods
Shelf          Stocking of goods on store          Rs.1,72,800    8,640      hours    of     shelf
stocking       shelves       and      on-going                    stocking
restocking                                         time
Customer       Assistance provided
Support        To customers including              Rs.3,07,200    15,36,000
Check -out                                         Items sold
(i) Family store currently allocates support (all costs other than cost of goods sold) to
product lines on the basis of cost of goods sold of each product line. Calculate the
operating income and operating income as a % of revenues for each product line.

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(ii) If family store allocates support costs (all costs other than cost of goods sold to
product line using an activity- based costing system; calculate the operating income
and operating income as a % of revenues for each product line.

9

Q.1. You are supplied with the following information and required to work out the
production hour rate of recovery of overheads in departments A,B & C.
Particular           Total        A          B           C               P            Q
Rs.       Rs.       Rs.          Rs.            Rs.           Rs.
Rent                12,000       2,400       4,800       2,000          2,000             800
Electricity             4,000         800    2,000           500          400             300
Indirect Labour         6,000    1,200       2,000       1,000            800        1,000
Depreciation            5,000    2,500       1,600           200          500             200
Sundries                4,500         910    2,143           847          300             300
31,500       7,810      12,543       4,547          4,000        2,600

Estimated working hours
Expenses of service departments P and Q are apportioned as under :
A             B                 C              P            Q
P         30%            40%              20%                           10%
Q         10%            20%              50%              20%

Q.2. PH Ltd, is a manufacturing company having three production departments, A, B
and C and two service departments X and Y. The following is the budget for
December 2005:
Total            A       B          C               X            Y
Rs.       Rs.         Rs.        Rs.            Rs.           Rs.
Direct material                  1,000      2,000       4,000          2,000        1,000
Direct wages                     5,000      2,000       8,000          1,000        2,000
Factory rent            4,000
Power                   2,500
Depreciation            1,000

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Area (sq. ft.)                               500        250              500     250            500
Capital value ( Rs. Lacs) of assets           20          40               20       10            10
Machine hours                              1,000       2,000            4,000   1,000          1,000
Horse power of machines                       50          40               20         15          25
A technical assessment of the apportionment of expenses of service department is as
under:
A%         B%                C%          X%         Y%
Service dept. X                 45          15           30                          10
Service dept. Y                 60          35                            5
Required:
(i) A statement showing distribution of overheads to various departments.
(ii) A statement showing re-distribution of service department expenses to
production Department.
(iii) Machine hours rates of the production department A, B, and C.

Q.3. Norma Ltd. Is a retail organization which operates three sales departments and
an administration department in a large supermarket complex. Each sales
department has a manager and its own prescribed gross margin related to selling
price. Exceptionally, the general manager permits the department managers to
reduce the selling price of a product by giving a quantity discount, a special price for
a large order or for an item of out-dated stock.
The following data are given:
Audio           &    Electrical        Furniture
video                Appliances
Equipment
(Rupees)             (Rupees)          (Rupees)
Stock at November 1
At cost                                 1,20,000             80,000               2,00,000
At full sales value                     2,00,000        1,10,000                  2,80,000
Transactions           during
November

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Purchases                               1,50,000           40,000              1,60,000
Net sales                               2,15,000           63,000              2,24,000
Price reductions approved                   5,000           3,000                  7,000
Expenditure incurred during November was:
Items               of     Amount       Basis of apportionment To sales
Rates                       4,000       Area Occupied
Light and heat              2,000       Area Occupied
Advertising                35,250       Sales value for the month before any reduction
Transport                  25,850       Sales value for the month before any reduction
Insurance                   3,525       Sales value for the month before any reduction
Miscellaneous               1,175       Sales value for the month before any reduction
Canteen                     4,125       Numbers of Employees
Salaries and Wages         24,910       See detailed information given below
Depreciation                3,750       See detailed information given below
Other detailed information for November Was:
Salaries      &    Depreciation     No . of        Ares
Wages               (Rupees)        Employees      Occupied
(Rupees)                                              (sq. m )
Audio       &     video           11,900               500              27           600
equipment
Electrical appliances                2,000             750               4           200
Furniture                            6,000           1,000              15           500
Total                       24,910                   3,750              55        1,600
Each month, the total costs of the administration department are apportioned to the
three sales Departments on the basis of the sales values for the month before any
reduction. Using the data given, prepare a tabulated profit and loss statement for
each sales department For November.

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Q.4. As a cost accountant of Oberon Ltd., you have prepared budget for sales
quantity, production, Materials, labour utilization and variable overheads for the year
ended 31st December 1999.
Information from the labour utilization budget is shown below:
Department                Work force              Labour hours             Hourly rate
North                       20                        35,000              Rs. 2.80
East                        25                        45,000              Rs. 2.60
West                        30                        55,000              Rs. 2.50
You have produced various estimates for the year‟s fixed costs, some of which can
be easily allocated direct to the three department and some which need to be
apportioned between the three department. The work so far is shown below:
Fixed cost items                         (Rs.)      Allocation or proposed basis
Of apportionment
North              East              West
Plant Depreciation                       40,000    20,000             15,000             5,000
Departmental office staff                59,000    15,000             18,000            26,000
Selling & Administration             1,45,000      50,000             40,000            55,000
Factory     rent,   rates    and         70,000    Floor area
insurance
Works Canteen                            22,500    Number of employees
Warehousing costs                        21,000    Materials consumed
Light & heat                             10,500    Floor area
Repairs & maintenance                    20,000    Net book value of assets weighted
According to average age.
You apportionment of fixed costs will be based on the following information
Floor area          Net           book     Average age of       Materials
(m2 )               value           of     Assets (Years )      Consumed
assets                                      (Rupees)
(Rupees)
North                1,200           1,00,000                     3               2,60,000

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East                 1,000          50,000                 2          1,20,000
West                  600           20,000                 5            40,000
Required:
(a) Calculate hourly fixed overhead absorption rates for the three departments.
(b) Produce a standard cost card showing how the selling price of a Weber PM2 is
arrived at if the following variable costs are incurred.
Materials: Rs.28.50
Labour: Department                North               2 hours
East               4 hours
West               3 hours
Oberon Ltd. Aims for a profit of 35% on sales.

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CHAPTER - 5                         PROCESS COSTING

Q.1 Product X is obtained after it passes through three distinct processes. You are
required to prepare process accounts from the following information:
Total          I         II            III
Material                    15,084       5,200      3,960         5,924
Wages                       18,000       4,000      6,000         8,000
1,000 Units at Rs. 6/- unit were introduce in process – 1.
Production overheads are to be distributed at 100% of direct wages.
Actual output     Normal loss          Value of scrap per
Process – I                                               unit
Process - II         950 Units             5%                    Rs.     4
Process - III        840 Units           10%                     Rs.     8
750 Units           15%                     Rs. 10

Also prepare abnormal loss/gain accounts, as well as normal loss account for each
process.

Q.2 Product P passes through three processes. Following are the relevant details:
a. Elements of cost:
Total         No. 1        No. 2            No. 3
Rs.          Rs.          Rs.               Rs.

Direct Materials            8,482        2,000       3,020             3,462
Direct Labour              12,000        3,000       4,000             5,000
Direct Expenses                726         500         226               -
Production Overheads        6,000           _             _                  _

1,000 units at Rs. 5 each were issued to process No.1

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b. Output from each process was:
Process No.1                                       920 units
Process No.2                                       870 units
Process No.3                                       800 units
c. Normal loss was estimated as :
Process No.1                      10% of units introduced
Process No.2                       5% of units introduced
Process No.3                      10% of units introduced
d. The loss in each process represented scrap which could be sold to a merchant at a
value as follows:
Process No.1                               Rs. 3 per unit
Process No.2                               Rs. 3 per unit
Process No.3                               Rs. 6 per unit
f. There was no stock of materials of work in progress in any department at the
beginning or end of the period. The output of each process passes direct to the next
process and finally to finished stock. Production overheads are allocated to each
process on the basis of 50% of the cost of direct labour.
Prepare process Accounts, Normal Loss A/c and Abnormal Loss & Abnormal Gain
Account.

Q.3   Product A Passes through three processes before it is transferred to finished
stock. The following information is obtained for the month of July:
Particulars                            Process -     Process -     Process -       Finished
I             II            III             Stock
Rs.           Rs.            Rs.           Rs.

Opening stock                                5,800         8,000          10,000        20,000
Direct materials                           40,000         12,000          15,000              _
Direct wages                               35,000         40,000          35,000              _
Manufacturing overheads                    20,000         24,000          20,000              _
Closing stock                              10,000          4,000          15,000        30,000
Profit % on transfer price to next                         20%             10%                _

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process                                       25%
Inter process profit for opening                    _       1,395         2,690       6,534
stock
Stock in process was valued at prime cost and finished stock has been valued at the
price at which it is received from Process III. Sales during the period were
Rs.4,00,000. Prepare and compute.
1.         Process cost accounts showing profit elements at each stage.
2.         Actual realized profit, and
3.         Stock valuation for balance sheet purpose.

Q.4 From the following information, prepare process account:
1. Opening work-in-progress                             Stage of completion
(200 Units/ Rs. 800/-)                            100% Materials
40% Labour
2.   Units introduced: 1050 units
3.    Transfer to next process: 1100 units

4.   Closing Stock: 150 units                Stage of completion
100% Materials
70% Labour
5.    Cost incurred during the period:
Material                             Rs.    1,050
Labour                               Rs.    2,250

Rs.    4,425

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Q.5)
a. The following data relate to process Q :
i. Opening work-in-process 4,000 units
Degree of completion: Materials (100%)                    Rs.24,000
Labour (60%)                      Rs.14,400
ii. Received during the month of April 2005, from Process - P : 40,000 units
iii. Expenses incurred in Process Q during the month: Rs.1,71,000
Materials: Rs.79,000
Labour: Rs.1,38,230
iv. Closing work-in-process: 3,000 units
Degree of completion:
Materials: 100%, Labour & Overheads: 50%
v. Units scrapped: 4,000 units
Degree of completion :
Materials: 100%, Labour & Overheads: 80%.
vi. Normal loss: 5% of current input.
vii. Spoiled goods realized Rs. 1.50 each on sale.
viii. Completed units are transferred to warehouse

Required to prepare:
1.    Equivalent units statement
2.    Statement of cost per equivalent unit and total costs.
3.    Process Q Account
4.    Any other account necessary.

Q.5 The following data are available in respect of process I for February 2006.
1. Opening stock of work-in-process : 800 units at a total cost of Rs.4,000
2. Degree of completion of opening work-in-process:
Materials                        100%
Labour                           60%

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3. Input of materials at a total cost of Rs.36,800 for 9,200 units.
4. Direct wages incurred Rs.16,740
6. Units scrapped 1,200 units. The stage of completion of these units was :
Materials                    100%
Labour                           80%
7. Closing work-in-process: 900 units. The stage of completion of these units was
Materials                     100%
Labour                         70%
8. 7,900 units were completed and transferred to the next process
9. Normal loss is 8% of the total input (Opening stock plus units put in).
10. Scrap value is Rs.4 per unit.
You are required to show the process & other accounts for February 2007.

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Chapter-9                            Material Cost Control

Q.1   XYZ ltd. manufactures three products P1, P2 and P3.                These are made in three
production departments from four materials M1, M2, M3 & M4.
The following information is supplied: Pre-determined product cost details:
Materials         Used        in   Cost per material        Products
Department       (Rs.)                    P1            P2        P3
(Unit per product)
M1                D1               0.50                     ---           1         2
M2                D2               0.20                     1             ---       2
M3                D2               0.25                     2             1         ---
M4                D3               0.15                     2             2         1

Budgeted details :                                Rs.               Rs.          Rs.
Sales for the year (Rs.000)                       260               580          450
Sales price each                                  5                 10           6

Stocks : Finished Products                        (in thousands of products)
At the beginning of the year 1st Jan              5                 10           15
At the close of the year – 31st Dec.              10                15           30
Stocks : Raw materials : (‘000              M1          M2            M3         M4
units)
At the beginning of the year 1st Jan        30          40            10         60
At the close of the year – 31st Dec.        40          30            20         60
Required to prepare:
1. The production budget.
Q.2   X Ltd. requires 2,500 units of Y per month. The cost per order placed is Rs.150/-
and each unit costs Rs.200. The cost of capital is 18% per annum.
You are required to calculate:
1. EOQ
2. Minimum total inventory cost including purchase cost.

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3. Number of orders per annum.
4. Inventory cycle.
Q.3   EXE Ltd. has received an offer of quantity discounts on its order of materials as
under:

Price per Tonne                     Tonnes
1,200                               Less than 500
1,180                               500 and less than 1000
1,160                               1,000 and less than 2000
1,140                               2,000 and less than 3000
1,120                               3,000 and above.
The annual requirement for the materials is 5,000 tonnes. The ordering cost per
order is Rs.1,200 and the stock holding cost is estimated at 20% of the materials
cost per annum. You are required to compute the most economical purchase level.
Q.4   From the following information you are required to calculate, for each product: (1)
re-order level (2) maximum stock (3) minimum stock (4) average stock.
Product X       Product Y
Average Consumption per week            50              50
Minimum requirement per week            25              25
Maximum usage per week                  75              75
EOQ                                     300             500
Replacement time                        4 to 6 weeks    2 to 4 weeks
Buffer stock                            200             150
Q.5   You are required from the data given below, to calculate for component 697:
a.       Re-order level
b.       Re-order quantity
c.       Minimum level
d.       Average stock held
Data: Components 697 is one of thousands of item kept in the stores of a
manufacturer
The maximum stock level has been set at 17,000 units
Expected consumption per month

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Maximum: 3,000 units
Minimum: 1,600 units
Estimated delivery period
Maximum – 4 months
Minimum – 2 months

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Chapter-10                    Operating Costing

Q.1. A cement manufacturing company is facing the problem of transportation from its
quarry. The quarry is situated 25 Kms away and the only means of transport
available is the roadways. The company has received quoatations from some of the
local transporters at Rs.22 Rs.22.50 and Rs.23 per tonne of limestone transported,
with an escalation clause in respect of diesel oil costs.
The quantity of limestone to be transported per month is 24,000 tonnes.
While studying the feasibility of department transport, the following facts came to be
recognized:
a. Two types of trucks are available in the market, namely, 10 tonners and 8
tonners
b. Details of operating costs for the trucks :
10 Tonner      8 Tonnre
Purchase price                                       Rs.2.5 Lakh     Rs.2.0 Lakh
Estimated useful life                                5 year          5 year
Residual value                                       Rs.40,000       Rs.20,000
Km. per litre of diesel                              3Km             4 Km
Estimated repair and maintenance cost per            Rs.1,000 P.m    Rs.1,600 P.m
truck
Vehicle and road tax per quarter                     Rs.600          Rs.600
c. cost of diesel per litre
d. cost of finance for purchase of trucks 12% p.a
e. Each vehicle can run 5 trips (up and down) each day, and can run on a an
average for 24 days in a month.
f. Drivers will have to be recruited according to the number of trucks to be
purchased. In addition, one extra driver for every 5 vehicles will be required for the
entire fleet. A driver will cost Rs.400 per month.
g. An additional transport supervisor would be required at a cost of Rs.1,000 per
month.
h. Yet another possibility is to hire sufficient number of trucks (8 tonnes only) from a
transport company at the rate of Rs.6,000 per month pe truck. The transport

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company will undertake to pay repairs an maintenance costs as well as vehicle and
road tax. The cement company has to bear the cost of driver, supervisor and other
operational costs.
You are required to advise the board on a appropriate choice among the above
alternatives considering also the option of entrusting the job to the transport
operators.
Q.2. Remix p.i.c makes ready-mixed cement and operates a small fleet of vehicles which
delivers the product to customers within its delivery area.
General data:
Maintenance records for the previous five year reveal:-
year           Mileage of vehicles        Maintenance cost (Rs)
1                   1,70,000                       13,500
2                   1,80,000                       14,000
3                   1,65,000                       13,250
4                   1,60,000                       13,000
5                   1,75,000                       13,750
Transport statistics reveal:
Number of journey          Average      tonnage       Average        distance   to
Vehicles    Each day (Trips)           Carried               to   customers
customers (Tones)          (miles)
1                  6                           4                       10
2                  4                           4                       20
3                  2                           5                       40
4                  2                           6                       30
5                  1                           8                       60
There are five vehicles operating a five day week, for 50 weeks a year.
Inflation can be ignored.
Standard cost data include:-
Driver‟s wages are Rs.150/- each per week.
Supervisor/relief driver‟s wages is Rs.200 per week.
Depreciation, on a straight line basis with no residual value:

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Cost                        Life
Vehicles (each)                        Rs.30,000                       5 Year
Petrol cost 30 P. per mile.
Repair cost 7 ½ P. per mile
Vehicle licences cost Rs.400 p.a. for each vehicle
Insurance cost Rs.600 p.a. in total
Tyres costs Rs.3,000 p.a. in total
Miscellaneous costs,Rs.2,250 p.a. in total.
you are required to calculate a standard rate per tonne/mile of operating vehicles.
Q.3   Taj group of Hotels runs a chain of hotels throughout the world. It has its head
office in Bombay. The management has been preparing its budget for the next year
and first hotel has selected in Hotel Taj, Bombay. The hotel does not remain fully
occupied always .However much depends on seasons. For this purpose, the year is
divided in three parts, summer, winter and monsoon each season of 4 months.
There are three types of rooms – ordinary, deluxe and aristocrat.

The management has made the estimate for the coming year.

Depreciation                             15,000
Salaries                                 25,00,000
Transportation                           1,50,000
Laundry Charges                          4,00,000
Bed Sheet etc;                           2,50,000
Municipal Taxes ,rates                   6,00,000

The charges mentioned above are fixed irrespective        of    capacity        utilization,
whereas charges mentioned below depend solely on the capacity utilization.

a.    Lighting

(i)    Rs. 20 per day in each season for ordinary room

(ii)   Rs. 25 per day in each season for Deluxe room

(iii) Rs. 30 per day in each season for aristocrat room

25
b.   Salary of room attendant

(i)    Rs. 40 per day ordinary room in summer

(ii)   Rs. 50 per day deluxe room in summer

(iii) Rs. 60 per day aristocrat room in summer

(iv) Rs.30,40&50 respectively for ordinary room, deluxe room and aristocrat room
respectively in winter and monsoon.

c.   Light refreshment

(i)    Rs.35 per day –for summer

(ii)   Rs.45 per day –for winter

(iii) Rs.60 per day-for monsoon

d.   Other expenses – Rs.20 per day room

The capacity utilization, as such, is very uncertain. However based on past
experience, following could be the best possible estimates:

In summer, the utilization is maximum and all 150 ordinary rooms remain occupied.
in the case of deluxe room and aristocrat rooms ,the utilization is 90 and 60 i.e.
90% and 80% respectively.

In winter, utilization is 80% and 60% and 40% respectively for ordinary, deluxe and
aristocrat rooms. In monsoon utilization is only 60%, 40% and 20% respectively.

In addition, each hotel has to bear the change of head office expenses,
proportionately. It is estimated that head office expenses would be Rs. 20,00,000/-
and that the Bombay branch will bear 10% of total head office expenses.

It is the management‟s policy to add 25% to the cost and further that aristocrat
room charges should be 3 tomes the ordinary room charge and deluxe room should
be twice the ordinary room change.

26
You required to work out various rates for the next year .Also work out thee rates if
deluxe room charge should be triple of ordinary room in charge in all season but in
aristocrat room case, charge should be 3.5 times in summer, 5 times in winter and 8
times in summer as compared to ordinary room charge.( Assume 360 days for
computation purpose)

27
Chapter-12                 Budgetary control

Q.1 A manufacturing company submits the following figures for the first quarter to
2005:

Particulars              Product-X       Product-Y       Product-Z
Sales in (unit)
Jan-2005                                      25,00        30,00         1,00,000
Feb-2005                                          0               0      1,00,000
Mar-2005                                      20,00        25,00         1,00,000
Selling price per unit                            0               0        Rs.40
30,00        35,00
0               0
Rs.10        Rs.20

Target for 1st quarter-2006
sales quantity increase               20%           10%             10%
sales price increase                    Nil         10%             25%
stock position 1st Jan2006
percent of Jan 2006 sales             50%           50%             50%
stock     position       31stmarch
2006                                      20,000          25,000          50,000
stock position Jan & Feb
2006
percentage        of     subsequent           50%           50%             50%
months sales
You are required to prepare the sales and production budget for the 1st quarter of
2006. Show working clearly.

28
Q.2 You are required, from the data given below, to prepare next years budget for
a. Production
b. Purchases
Standard cost data are as follows:
Products       Product
Aye            Bee
Rs.            Rs.
Direct Materials
X     24 kilos at Rs. 2                           48
30 kilos at Rs. 2                                      60
Y     10 kilos at Rs. 5                           50
8 kilos at Rs. 5                                       40
Z         5 kilos at Rs. 6                        30
10 kilos at Rs. 6                                          60

Direct wages
Unskilled         10 hours at Rs. 3 per hour      30
5 hours at Rs. 3 per hour                  15
Skilled               6 hours at Rs. 5 per hour   30
5 hours at Rs. 5 per hour                  25

Production overheads are absorbed on the basis of direct labour hours while other
overhead is recovered on the basis of 20% of production cost. Profit is calculated at
20% of sales price.
Budgeted data for the year:
Materials
X                   Y           Z
Rupees              Rupees      Rupees

29
Stock at standard price:
1st January                        60,000              1,25,000           72,000
31st December                      70,000              1,35,000           75,000
Labour hours: 75,000
Products              Product
Aye (Rs.)             Bee (Rs.)
Finished goods at production cost
Opening stock                                    1,52,000                     2,56,000
Closing stock                                    1,90,000                     3,52,000
Sales at standard sales price                 13,68,000                      15,36,000

Q.3 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, the labour cost budget.

Product      –   Product     –    Product – C
A                B                (Rs.000)
(Rs.000)         (Rs.000)
Finished stocks:
Budgeted stocks
1st January next year                            720              540              1,800
31st December next year                          600              570              1,000
All stocks are valued at standard costs per      24               15               20
unit
Standard profit calculated as percentage         20%              25%              16.2/3%
of
selling price

Total        Product– A          Product – B           Product – C

30
(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 rejection of production                10%               20%             5%
Standard labour times per unit rate and standard rates per hour:
Rate       Hours per Unit
Product - A      Product - B   Product - C
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

Q.4 The expenses budgeted for production of 10,000 units in a factory are furnished
below:
Per unit
Materials                                      70
Labour                                         25
Selling expenses (10% Fixed)                   13
Distribution Expenses (20% Fixed)              7

Total cost of sale per unit (to make and       155

31
sell)
Prepare a budget for production of:
a. 8,000 units
b. 6,000 units
Also, calculate the budgetary allowance for 7,000 units.

Chapter-13                      STANDARD COSTING

Q. 1 Stick-well Ltd. is operating a standard costing technique. Standards for one
batch revealed the following:
Materials      Quantity           Price         Total Cost
A            30                  4           120
B            25                  2.4           60
C            45                  4           180
Input        100
Loss         10
Output       90                              360

In a particular period, when five batches were produced, records revealed the
following data:
Materials      Quantity        Price       Total Cost
A              180             4.5         810
B              160             3           480
C              260             3           780
Input          600
Loss           150
Output         450                         2,070
You are required to compute the materials cost variances:

Q.2 From the following details, compute the labour cost variances.

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Standard Data (500 units)                  Actual data (600 units)
Type         Hours   Rate      Total       Type        Hours        Rate        Total
Skilled      300     3         900         Skilled     248          4           992.00
Men                                        Men
Skilled      120     2         240         Skilled     93           1.5         139.50
Women                                      Women
Unskilled    180     1         180         Unskilled   279          1           279.00
600               1320                    620                      1410.50

Q.3 X Ltd. manufactures product X which requires 2 hours of skilled men, 3 hours of
semi-skilled men and 5 hours of unskilled men per unit at Rs.5, 3 & 2 per hour
respectively. During January 2003, the production department reported output of
5000 units of product X. The labour cost incurred was as detailed below:
Type                        Hours paid for              Rate per hour
Skilled                     9,000                       Rs.7
Semi-skilled                17,000                      Rs.2.75
Unskilled                   30,000                      Rs.1.50
56,000
The total hours paid for included 1000 idle hours due to machine break down etc.
out of which 500 hours pertained to skilled men, 400 hours pertained to semi-skilled
men and balance to unskilled men.
Required:
1. Calculate labor cost variances.
2. Recalculate the labor cost variances, given that the break up of 1000 idle hours is
not given.

Q.4 From the following information about sales calculate necessary sales variances.
Product                     Standard                            Actual
No.     Rate      in    Total        No         Rate         in   Total
Rs.     Per     Rs.                     Rs.        Per    Rs.
unit                                    unit

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A            5,000      5           25,000        6,000     6         36,000
B            4,000      6           24,000        5,000     5         25,000
C            3,000      7           21,000        4,000     8         32,000
12,000                 70,000        15,000              93,000
The company‟s budgeted market share was 20% and the actual market size was
90,000 units.
Q.6 Vinak Ltd. has furnished you the following information for the month of August
2003.
Budget           Actual
Output (units)              30,000              32,500
Hours                       30,000              33,000
Working days                      25                 26
Calculate the fixed overheads cost variances.

Q.7 A company produces a single product from a single material, It operates a standard
cost system and furnishes you the following information.
Particulars                          Standard        Actual
Production                           8,000           6,000
Materials:
Total Quantity – kg                  16,000          13,000
Total Amount                         32,000          27,000
Labor:
Total hours                          2,400           2,000
Total amount                         3,000           3,000
Total Amount                         2,400           2,200
You are required to compute the necessary variances.

Q.8 Modern Toys Ltd. had budgeted the following for a month:
Toy A   900 units at Rs.50 per unit

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Toy B     600 units at Rs.100 per unit
Toy C    1500 units at Rs.75 per unit
As against this the actual sales were:
Toy A        1000 units at Rs.55 per unit
Toy B          700 units at Rs.95 per unit
Toy C        1100 units at Rs.78 per unit
The standard costs per unit of A, B, C were Rs.45/- Rs.85/- and Rs.65/- respectively
whereas actual costs per unit were Rs.50/-, Rs.80/- and Rs.70/- respectively.
Compute necessary sales and profit variances.

Q.9 The standard profit per unit of Y is Rs.3/-, ascertained as follows:
Standard costs per unit
Materials (4 kg at Rs.1.50)                                  6.00
Labor (5 hours at Rs.0.80)                                   4.00
Overheads – variable at Rs.0.30 per hour                     1.50
Fixed at Rs.0.50 per hour                     2.50
Total cost per unit                          14.00
Profit per unit                               3.00
Selling price                                17.00
The standard cost statement has been drawn up on the basis of production and
sales of 4000 units per month as against the available capacity of 5000 units. For
the month of March, 2003, the following profit and loss emerged:-
Rs.            Rs.
Sales (3,500 units)                                    66,000
Less: Cost of goods produced:
Materials at Rs.1.40 per kg      21,000
Labor at Rs.0.85 per hour        15,640
Actual profit                                   13,660
Other information:

35
1. The number of days worked in the March were 23 as against the normal 25 days
per month.
2. Failure of power led to idleness of 1,000 hours.
You are required to reconcile the actual and standard profits on the basis of
variances. Also calculate all possible ratios.

Q.10 X Ltd. manufactures product X, the standard production cost of which is as given
below:
Direct material         5 kg            at Rs.2/- per kg
Direct labor            2 hours          at Rs.3/- per hour
Variable overheads 2 hours              at Rs.0.50/- per hour
Fixed overheads         2 hours         at Rs.1/- per hour
The budget for current year was based on production and sale of 5000 units to be
sold at Rs.30 per unit. As against this, the company sold 6000 units at Rs.28 per
unit. During the year the company manufactured 8000 units and further, it had 2002
incomplete units which are estimated to be80%, 60% complete as regards material,
labor and overheads respectively. The company had opening stock of 500 units.
During the year, the company incurred expenses as detailed below:
Direct material               50,000 kg purchased at Rs.1.8 per kg
Direct labor                  9,000 hours at Rs.3.5 per hour
You are required to calculate sales and profit variances.

Q. 11 X Ltd. operates standard costing system. The following variances were reported
for the Month of May, 2003.
Materials price variances                       300 (A)
Materials mix variances                         200 (F)
Usage variances                                 500 (A)
Labor rate variances                            300 (F)
Idle time variances                             150 (A)

36
Labor mix variances                         250 (A)
Standard material cost                    Rs.10,200
Actual labor cost                          Rs.8,700
You are required to calculate:
a. Labor time variances
b. Material yield variances
c. Actual material cost
d. Standard labor cost
It is known that standard rate of pay (average) is 50% of fixed overheads rate.

37
Chapter – 14                 Marginal Costing

Q.1 From the following information, you are asked to compute:
1. Break-even point in value and volume
2. P/V ratio.
3. Margin of safety
4. Margin of safety ratio
Rs.
Sales value                                     20,00,000
Material cost                                    4,00,000
Labour cost                                      5,00,000
Variable manufacturing expenses                  1,00,000
Variable selling and distribution expenses       2,00,000

SALARY :
Factory supervisor                     12,000
Office manager                         18,000
Other office employees                 60,000

Repairs and maintenance                                  Rs.90,000
Depreciation, rate and taxes                             Rs.30,000
Salesman‟s Commission                                 5% of sales

38
(not included in selling and distribution expenses)
Selling price per unit                                          Rs.100/-
Fixed selling and distribution overheads                   Rs.1,90,000

Q.2 The budgeted sales of the products of the company are as follows:
Products
X           Y          Z
Budgeted sales in unit                 10,000      15,000     20,000
Budgeted sales price per unit                  4          4        4
Budgeted variable costs per unit             2.5          3       3.5
Budgeted fixed expenses                12,000       9,000      7,500
From the above information, you are required to compute the following for each
product;
a. The budgeted profit
b. The budgeted break even sales
c. The budgeted margin of safety in terms of sales value.

Q.3 The Asian Industries specialize in the manufacture of small capacity motors. The
cost structure of the motor is as under:
Material                     Rs.50
Labor                        Rs.80
Variable overhead      75% of labor cost
Fixed overheads of the company amounted to Rs.2.30 lakhs per annum. The sale
price of the motor is Rs.230 each.
a. Determine the number of motors that have to be manufactured and sold in a year
in order to break-even.
b. How many motors have to be made and sold to make a profit of Rs.1 lakh per
year?

39
c. If the sales price is reduced by Rs.15 each, how many motors have to be sold to
break-even?

Q.4 X Ltd. manufactures a standard product, the marginal costs (Per unit) of which are
as follows:

Direct materials                                   Rs.160.00
Direct wages                                       Rs.120.00
Total                                              Rs.300.00
Its annual budget includes the following:
Output: 40,000 units
Production                                         Rs.80,00,000
Marketing                                          Rs.40,00,000
Rs.1,68,00,000
Total                                              Rs.2,00,00,000
Contribution
Recently, the top management of the organization has started thinking in terms of
revising its budget and some alternatives in the form of proposals (Stated below)
where discussed in its last board meeting.
Proposal – І
The organization expects a profit of Rs.48,00,000/- and want to know the selling
price to be quoted for that purpose. It is estimated that (a) an increase in
advertising expenditure of Rs.9,44,000/- would result in a 10% increase in sales
increase by Rs.2,00,000 and Rs.1,36,000/- respectively.
Proposal – ІІ
quantity would go up by 20% and a profit margin of 15% would be obtained. Under

40
expected to increase by Rs.2,00,000 respectively. The organization wants to know
result.
You are required to prepare forecast statements for each of these alternatives and
determine the selling price per unit to be quoted (Proposal – І) and the additional

Q.5 Ever Forward Ltd. is manufacturing and selling two products:- Splash and Flash at
selling price of Rs.3 and Rs.4 respectively. The following sales strategy has been
outlined for the year 2004.
(1) Sales planned for year will be Rs.7.20 lakhs in the case of Splash and Rs.3.50 in
the case of Flash.
(2) To meet the competition, the selling price of Splash will be reduced by 20% and
that of Flash by 12.5%.
(3) Break-even is planned at 60% of the total sales of each product.
(4) Profit for the year to be achieved is planned as Rs.69,120 in the case of Splash
and Rs.17,500 in the case of Flash. This would be possible by launching a cost
reduction programme and reducing the present annual fixed expenses of
Rs.1,35,000 allocated as Rs.108,000 to Splash and Rs.27,000 to Flash.
You are required to present the proposal in financial terms giving clearly the
following information:-
(a) Number of units to be sold of Splash and Flash to break even as well as the total
number, of units of Splash and Flash to be sold during the year.
(b) Reduction in fixed expenses product-wise that is envisaged by the Cost
Reduction Programme.
Q.6 The particulars two plants producing an identical product with the same selling
price are as under:
Plant - A        Plant - B
Capacity utilization         70%           60%
(Rs. In lakhs)   (Rs. In Lakhs)
Sales                       150              90
Variable costs              105              75

41
Fixed costs                30            20
It has been decide to merge Plant B with Plant A; the additional fixed expenses
involved in the merger will amount to Rs.2 Lakhs p.a.
Required;
a. Find the break-even point of plant A and plant B before the merger and the
break-even point of merged plant.
b. Find the capacity utilization of the integrated plant required to earn a profit of
Rs.18 lakhs

Q.7 Kalyan University conducts a special course of „Computer Applications‟ for a month
during summer. For this purpose, it invites applications from graduates. An entrance
Test is given to the candidates and based on same, a final selection of a hundred
candidates is made. An entrance test consists of four objective types of
examinations and is spread over four days, one examination per day. Each
candidate is charged a fee of Rs.50/- for taking up the entrance test. The following
data was gathered for the past two years.
KALYAN UNIVERSITY
Statement of Net revenue from the Entrance Test for the course on “Computer
Applications”
2002        2003
Gross Revenue (Fees collected)                                 1,00,000   1,50,000
Costs:
Valuation                                                        40,000     60,000
Question booklets                                                20,000     30,000
Hall rent at Rs.2,000 per day                                     8,000       8,000
Honorarium to chief administrator                                 6,000       6,000
Supervision charges (One supervisor for every 100
candidates at the rate of Rs.50 per day)                          4,000       6,000
TOTAL COST                                                       84,000   1,16,000
Net Revenue                                                    16,000      34,000
You are required to compute:

42
a. The budgeted net revenue if 4,000 candidates take up the entrance test in 2004.
b. The break-even number of candidates.
c. The number of candidates to be enrolled if the net income desired is Rs.20,000/-

Q.8 X company has been so far producing and selling following three products.
Information about selling price and the cost is given below:
Product
X                Y              Z
Selling price                            Rs.14.00        Rs.16.00       Rs.13.00
Costs:
Materials                           Rs.5.00        Rs.10.00        Rs.2.00
Labor                               Rs.2.00         Rs.1.00        Rs.3.00
Net profit (loss)                         Rs.1.00         Rs.2.00     Rs.(1.00)
The company at present has been producing 5000 units of X, 8000 units of Y and
1000 units of Z. As product Z has been consistently fetching sizeable amount of loss
only, the company virtually is putting no worth noting effort to augment the sales of
the same. In fact it is seriously thinking of dropping this product. The fixed
overheads in all amount to Rs. 50,500/- p.a. and they are apportioned to the three
products on the basis of labor cost.
You are required to state profit implications of dropping product Z.

Q.9 A multi-product company has the following costs and output data for the last year:-
Product
X                 Y              Z
Sales mix (in value)                   40%               35%            25%
Selling price                          Rs.20             Rs.25          Rs.30
Variable cost per unit                 Rs.10             Rs.15          Rs.18
Total fixed costs                          Rs.1,50,000
Total sales                                Rs.5,00,000

43
The company processes to replace product Z with product S.
Estimated cost and output data are:
Product
X              Y               S
Sales mix (in value)                                50%            30%             20%
Selling price                                       Rs.20       Rs.25              Rs.28
Variable cost per unit                              Rs.10       Rs.15              Rs.14
Total fixed costs                          Rs.1,60,000
Total sales                                Rs.4,50,000
Analyze the proposed change and suggest what decision the company should take.
Also state the break-even point for the company as a whole in the two situations.

Q.10 Tours Ltd. produces three products A, B and C from the same manufacturing
facilities. The cost and the other details of the three products are as follows:
A              B           C
Selling price/unit (Rs.)                             200           160         100
Variable cost/unit (Rs.)                             120           120             40
Maximum production per month (unit)                 5000 or     8000 or      6000 or
Maximum demand per month (units)                    2000        4000         2400
Processing hours can not be increase beyond 200 hours per month. Fixed cost is
Rs.2,76,000/- p.m.
You are required to:
a. Compute the most profitable product mix.
b. Compute the overall break-even sales of the company for the month based on the
mix calculated in (a) above.

Q.11 A firm can produce three different products from the same raw material using the
same production facilities. The requisite labor is available in plenty at Rs.8 per hour
for all products. The supply of raw materials, which is imported at Rs.8 per Kg. is
limited to 10,400 Kgs. for the budget period. The variable overheads are Rs.5.60 per
hour. The fixed overheads are Rs.50,000. The selling commission is 10% on sales.

44
a. From the following information, you are required to suggest the most suitable
sales mix, which will maximize the firm‟s profits. Also determine the profit that will
be earned at that level:
Product    Market              Selling     price   Labor hours      Raw          material
demand              per unit Rs.        required         required         per
(units)                                 per Unit         Unit
X            8,000                   30                     1              0.7
Y            6,000                   40                     2              0.4
Z            5,000                   50                   1.5              1.5
b. Assume, in above situation, if additional 4,500 kgs of raw materials is made for
production, should the firm go in for further production, if it will result in additional
fixed overheads of Rs.20,000 and 25% increase in the rates per hour for labor and
Q.12 The Management of M/s. Rama Ltd. Has prepared the following estimates of
working results for the year ending 31st December,2003, for the purpose of
preparing the budget for the year ending 31st December 2004.
Rupees
Direct materials             per unit                  8.00
Direct wages                 per unit                 20.00
Selling price               per unit                  62.50
Fixed overheads          per annum            Rs. 3,37,500
Sales                     per annum        Rs. 12,50,000
It is expected that during the year 2004, the material prices and the variable
overheads will go up by 10% and 5% respectively. As a result of reorganization of
production methods, the overall direct labor efficiency will increase by 12% but the
wage rate will go up by 5%. The fixed overheads are expected to increase by
Rs.62,500/-. The marketing manager states that market will not absorb any increase
in the selling price. However, he is of the view that if advertisement expenditure is
increased, the sales quantity will increase as under;

45
Additional Units of sales             2,000         4,000          6,000       8,000
You are required to;
a. Present an income statement for the year 2003.
b. Evaluate the four alternative proposals put forth by the marketing manager,
determine the best output and sales level to be budgeted and prepare an overall
income statement for 2004 at that level of output and sales:
Q.No.6)        An agriculturists has 480 hectares of land on which he grows potatoes,
tomatoes peas and carrots. Out of the total area of land, 340 hectares of land
suitable for all the 4 vegetables but the remaining 140 hectares is suitable only for
growing peas and carrots. Labor for all kinds of farm work is available in plenty.
The market requirement is that all the 4 types of vegetables must be produced with
a minimum of 5,000 boxes of any one variety. The farmer has decided the area
devoted to any crop should be in term of complete hectares and not in fractions.
The only other limitation is that not more than 1,13,750 boxes any one vegetable
can be sold.
The relevant data concerning the production, market prices and costs are as below:
Potatoes Peas           Carrot     Tomatoes
Annual Yield : Boxes per hectare             350         100         70         180
Costs: Direct Material per hectare (Rs.)     952         432         384        624
Direct Labour: (Rs.)
-   Growing per hectare                      1,792    1,216       744        1056
-   Harvesting and packing per box            7.20        6.56    8.80       10.40
-   Transport per box                        10.40    10.40       8          19.20
Market Price per Box (rs.)                   30.76       31.74       36.80      44.55
Fixed expenses per annum:
Growing Rs.1,24,000                Harvesting Rs.75,000                   Transport
Rs.75,000
It is possible to make the land presently suitable for peas and carrot, viable for
growing potatoes and tomatoes is certain development work in undertaken. This
work will involve capital expenditure of Rs.6,000 per hectare which bank is prepared
to finance at 15% interest per annum. If such improvement is undertaken, the

46
harvesting cost of entire crop of tomatoes will decrease on an average by Rs.2.60
per box.
Required:
1. Calculate, with in the given constraints, the area to be cultivated in respect of
each crop to achieve the maximum total profit and the amount of such profit
before the land development work in undertaken.
2. Assuming that the other constraints continue, advice whether the land
development scheme should be undertaken and if so the maximum total
profit that would be achieved after the said development scheme is
undertaken.

47

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