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I.

The Rathi Engineering Company Ltd manufactures special-purpose small


machines to order. In the beginning of the year, there were two jobs in process,
namely, Job No. 100 and Job No. 101. The following costs were applied to these
jobs in the previous year:
Direct materials
Direct labour
Overheads

Job 100
Rs 25,000
20,000
22,200
67,200

Job 101
Rs 40,000
15,000
16,650
71,650

During January of the current year, the following transactions took place:
1.
Raw materials costing Rs 2,00,000 were purchased on account.
2.
Supplies costing Rs 40,000 were purchased for cash.
3.
Jobs 102, 103 and 104 were started and the following costs applied to them:

4.
5.
6.
7.
8.
9.

II.

Job 102
Job 103
Job 104
Direct materials
Rs15,000 Rs 50,000
Rs 35,000
Direct labour
25,000
30,000
20,000
Jobs 100 and 101 were completed; additional direct labour costs incurred on them
were Rs 10,000 and Rs 20,000 respectively.
Wages paid to production employees during January totaled Rs 1,25,000, of
which accrued wages of the previous year were Rs 25,000; wages payable at the
end of the current month were Rs 20,000.
Depreciation for the month totaled Rs 50,000.
Utilities bills totaling Rs 60,000 were received for the January operations.
Supplies costing Rs 10,000 were used.
Miscellaneous overhead rate for the month of January.
Actual overhead is applied for individual jobs at the end of each month using a
rate based on actual direct-labour costs. You are required to
(a) Determine the overhead rate for the month of January.
(b) Determine the amount of profit earned on Jobs 100 and 101, assuming job
prices of Rs 1,10,000 and Rs 1,70,000 respectively.
(c) Prepare a statement of cost of goods manufactured.
A jobbing factory has undertaken to supply 200 pieces of a component per month
for the ensuing 6 months. Every month a batch order is opened against which
materials and labour-hours are booked at actuals; overheads are levied at a
per/labour hour rate. The selling price contracted for is Rs 8 per piece.

Months
January
February
March
April
May

Batch output Material cost


210
Rs 650
200
640
220
680
180
630
200
700

Direct wages
Rs 120
140
150
140
150

Direct labour-hours
240
280
280
270
300

June

220

720

160

320

The other details are:


Month
January
February
March
April
May
June

Chargeable expenses
Direct labour-hours
Rs 12,000
Rs 4,800
10,560
4,400
12,000
5,000
10,580
4,600
13,000
5,000
12,000
4,800

From the following data, present the cost and profit per piece of each batch order
and overall position of the order for 1,200 pieces:
III.

AB Ltd is engaged in the process engineering industry. During the month of


April, 2000 units were introduced in process X, the normal loss was estimated at 5
per cent of input. At the end of the month 1,400 units had been produced and
transferred to process Y; 460 units were incomplete and 140 units had to be
scrapped during the process. The incomplete units had reached the following
stages of completion: Material, 75 per cent; Labour, 50 per cent; Overhead, 50 per
cent.
Further information on process X:
Cost of the 2,000 units
Additional direct material
Direct labour
Direct overhead

Rs 58,000
14,400
33,400
16,700

Scrapped units realized Rs 10 each.


Prepare a statement of equivalent production, statement of cost, statement of
apportionment of cost and process X account.
IV. As the chief financial analyst of a company, you have been asked by the chief
executive to explain the differences between two income statements prepared for
his consideration: one was prepared by the controller and the other by the sales
manager. Both used the same data from operations.
Sales (30,000 units)
Cost of goods sold:
Opening inventory
Production costs
Less: closing inventory
Total

Statement A
Statement B
Rs 30,00,000
Rs 30,00,000
18,00,000
(6,00,000)

27,00,000
(9,00,000)
18,00,000

Gross profit
Less: other costs
Income

12,00,000
18,00,000
(15,00,000)
3,00,000

12,00,000
(6,00,000)
6,00,000

The only variable costs of production are Rs 40 per unit.


(i)
Determine which statement was prepared using variable costing and which
using absorption costing. Explain how do you know it?
(ii)
Determine: (a) fixed production costs; (b) selling and administrative costs, (c)
production in units; and (d) cost per unit of inventory for both statements.
V.

The question as to which products to stress in order to obtain the most profitable
sales-mix has always been of prime importance to businessmen. The amount of
profit contribution, or the difference between the selling price and the variable
costs, tells how much each product is contributing to fixed costs and profit in the
present sales-mix. This information assists management in forming an opinion as
to which products will add to profits if sales of these units can be increased.
Direct cost data can be utilized in this type of analysis when management seeks an
answer to the question: Which product shall we push?
Data
Selling price
Variable cost
Fixed costs
Units per hour

Product A
Rs 12.60
9.62
2.07
45

Product B
Rs 5.50
4.18
0.65
0.70

1. What is the amount of net profit for each product?


2. What is the percentage of profit to selling price for each product?
3. What is the amount of profit contribution towards fixed cost and the profit for
each product?
4. What is the profit contribution ratio?
5. What is the profit contribution per hour for each product?
6. If one allocates: (a) 200 hours to Product A and 100 hours to Product B or (b) 100
hours to Product A and 200 hours to Product B, which of the two courses is more
profitable?
VI.

A.T.Ltd operating at 80 per cent level of activity furnishes the following


information:
Particulars
Selling price/units
Profit as percentage on selling price
Units produced and sold
Fixed costs

Products
A
B
C
Rs 10 Rs 12
Rs 20
25
33.33
20
10,000 15,000
5,000
40,000 45,000
25,000

During the year, the variable costs are expected to increase by 10 per cent. There will,
however, be no change in fixed costs, the selling prices and the units to be produced and
sold. The sales potential for each of the products is unlimited.
(i)
You are required to prepare a statement showing the P/V ratio, break-even point
and margin of safety for each product and for the company as a whole.
(ii) The company intends to increase the production of only one of the three products
to reach the full capacity level by utilizing the spare capacity available. Assuming
that all the three products take same machine time, advise with reasons, which of
the three products should be produced so that the overall profitability is the
maximum.
VII.

Problem for Self-Study


Foxwood Company is a metal- and woodcutting manufacturer, selling products to
the home construction market. Consider the following data for 2010:
Sandpaper
Materials-handling Costs
Lubricants and Coolants
Miscellaneous indirect manufacturing labor
Direct manufacturing labor
Direct materials inventory Jan. 1, 2009
Direct materials inventory Dec, 31, 2009
Finished goods inventory Jan. 1, 2009
Finished goods inventory Dec, 31, 2009
Work-in-process inventory Jan. 1, 2009
Work-in-process inventory Dec, 31, 2009
Plant-leasing costs
Depreciation-plant equipment
Property taxes on plant equipment
Fire insurance on plant equipment
Direct materials purchased
Revenues
Marketing promotions
Marketing salaries
Distribution costs
Customer-service costs

Rs 2,000
70,000
5,000
40,000
300,000
40,000
50,000
100,000
150,000
10,000
14,000
54,000
36,000
4,000
Rs 3,000
460,000
1,360,000
60,000
100,000
70,000
100,000

Required
1.

Prepare an income statement with a separate supporting schedule of cost of goods


manufactured. For all manufacturing items, classify costs as direct costs or
indirect costs and indicate by V or F whether each is basically a variable cost or a
fixed cost (when the cost object is a product unit). If in doubt, decide on the basis

2.

3.
4.

of whether the total cost will change substantially over a wide range of units
produced.
Suppose that both the direct material costs and the plant-leasing costs are for the
production of 900,000 units. What is the direct material cost of each unit
produced? What is the plant-leasing cost per unit? Assume that the plant-leasing
cost is a fixed cost.
Suppose Foxwood Company manufacturers 1,000,000 units next year. Repeat the
computation in requirement 2 for direct materials and plant-leasing costs. Assume
the implied cost-behavior patterns persist.
As a management consultant, explain concisely to the company president why the
unit cost for direct materials did not change in requirements 2 and 3 but the unit
cost for plant-leasing costs did change.