Cost & Management Accounting

December 2023 Examination

Q1. The following details have been extracted from Sam Ltd.’s books of accounts for
the year ending March 31, 2023. The manager of the company is shared and divides his
time between the factory and the office in the ratio of 20:80. You are required to
compute: (a) prime cost, (b) factory overhead, (c) factory cost, (d) over head and (e) cost
of sale. (10 Marks)

Stock of Materials: Opening 2,82,000.00

Stock of Materials: Closing 3,00,000.00
Materials Purchased during the year 12,48,000.00
Direct Wages 3,57,600.00
Indirect Wages 24,000.00
Salaries for Administrative Staff 60,000.00
Freights: Inwards 48,000.00
Freights: Outwards 30,000.00
Cash Discount Allowed 21,000.00
Bad Debts W/Off 28,200.00
Repairs to Plant and Machinery 63,600.00
Rent, Rates and Taxes of Factory 18,000.00
Rent, Rates and Taxes of Office 9,600.00
Travelling Expenses 18,600.00
Salesmen's salaries and commission 50,400.00
Depreciation W/Off: Plant and Machinery 42,600.00
Depreciation W/Off: Furniture 3,600.00
Director's fees 36,000.00
Electricity Charges: Factory 72,000.00
Fuel Charges: Boiler 96,000.00
General Charges 37,200.00
Manager's Salary 72,000.00

Ans 1.

Introduction

Cost and Management Accounting is a specialized branch of accounting that aims to capture
a company's total production costs by assessing the variable costs of each step of production
as well as fixed costs, such as depreciation of capital equipment. By understanding these
costs in detail, organizations can derive meaningful insights into operational efficiency and
profitability. In the given scenario, we delve into the financial details of Sam Ltd. for the
fiscal year ending March 31, 2023. The objective is to compute various cost components,
including prime cost, factory overhead, factory cost, overhead, and cost of sale. These
computations are essential for the company to ascertain its production efficiency, cost
management, and to make informed pricing decisions. The data provided encompasses
various elements like material stocks, wages, freights, and other operational expenses. By
analyzing these, we can determine the cost structure of Sam Ltd. and provide
recommendations for potential improvements.

Concept and application

1. Understanding the Components of Cost:

Before diving into the calculations for Sam Ltd., it's essential to understand the various
components of cost in cost accounting:

Prime Cost: This is the total of direct materials, direct labor, and direct expenses. It
represents the initial cost of producing a product before any overheads are considered.

Factory Overhead: These are the indirect costs associated with manufacturing. It includes
indirect materials, indirect labor, and other indirect expenses related to the production
process.

Factory Cost: This is the sum of the prime cost and factory overhead. It represents the total
cost incurred in the factory to produce goods.

Overhead: Overhead costs are the indirect costs that are not directly tied to a specific activity
like manufacturing, production, or sales. These costs are more difficult to assign to a product
or service, so they are allocated based on certain allocation bases.

Cost of Sale: This is the total cost incurred to produce the goods that were sold during a
particular period. It includes the opening stock of finished goods, adds the cost of goods
produced, and subtracts the closing stock of finished goods.

2. Calculations for Sam Ltd.:

Using the provided data, let's compute the various costs:

Direct Materials Consumed:

Opening Stock of Materials + Purchases + Freights Inwards - Closing Stock of Materials

= 2,82,000 + 12,48,000 + 48,000 - 3,00,000

= 12,78,000

Prime Cost: Direct Materials Consumed + Direct Wages

= 12,78,000 + 3,57,600

= 16,35,600

Factory Overhead:

Indirect Wages + Repairs to Plant and Machinery + Rent, Rates, and Taxes of Factory +
Depreciation on Plant and Machinery + Electricity Charges for Factory + Fuel Charges for
Boiler

= 24,000 + 63,600 + 18,000 + 42,600 + 72,000 + 96,000

= 3,16,200

Factory Cost: Prime Cost + Factory Overhead

= 16,35,600 + 3,16,200

= 19,51,800

Administrative Overhead: Salaries for Administrative Staff + Rent, Rates, and Taxes of
Office + Travelling Expenses + Depreciation on Furniture + Director's Fees + General
Charges + (80% of Manager's Salary, since he spends 80% of his time in the office)

= 60,000 + 9,600 + 18,600 + 3,600 + 36,000 + 37,200 + (0.8 * 72,000)

= 2,37,000

Selling and Distribution Overhead:

Freights Outwards + Salesmen's Salaries and Commission + (20% of Manager's Salary, since
he spends 20% of his time in the factory)

= 30,000 + 50,400 + (0.2 * 72,000)

= 1,54,400

Total Overhead: Factory Overhead + Administrative Overhead + Selling and Distribution

Overhead

= 3,16,200 + 2,37,000 + 1,54,400

= 7,07,600

Cost of Sale: Factory Cost + Administrative Overhead + Selling and Distribution Overhead

= 19,51,800 + 2,37,000 + 1,54,400

= 23,43,200

3. Interpretation and Analysis:

Prime Cost: The prime cost gives us a clear picture of the direct costs associated with
producing goods. For Sam Ltd., a significant portion of this cost comes from materials,
indicating a material-intensive production process.

Factory Overhead: The factory overheads provide insights into the indirect costs of
production. The high costs associated with electricity and fuel suggest that the production
process might be energy-intensive.

Factory Cost: This cost gives a comprehensive view of the total production cost, both direct
and indirect. It's essential for pricing decisions and profitability analysis.

Overhead: The overhead costs, especially administrative overheads, provide insights into the
company's operational efficiency. High overheads might indicate inefficiencies or areas
where cost-cutting can be implemented.

Cost of Sale: This is a crucial metric for understanding the cost structure related to the goods
sold. It's pivotal for pricing strategies and ensuring profitability.
Conclusion

The process of Cost and Management Accounting is crucial for businesses to ensure they are
operating efficiently and to identify areas for cost optimization. For Sam Ltd., understanding
these costs is not just about number crunching but about gaining insights into its operations.
By breaking down the costs into prime cost, factory overhead, and other components, the
company can pinpoint where its resources are being utilized most and where there might be
room for improvement. Furthermore, understanding the cost of sale is pivotal for pricing
strategies and ensuring profitability in the competitive market. The data provided, ranging
from material costs to managerial salaries, paints a comprehensive picture of the company's
expenditures. By meticulously analyzing these figures, Sam Ltd. can make informed
decisions about its operations, investments, and growth strategies. In essence, the detailed
cost analysis serves as a foundation for the company's financial health and strategic planning,
ensuring sustainability and growth in the long run.

Q2. You are required to compute the labor turnover using different methods of labor
turnover measurement from the following information provided for Manas Ltd. for the
month of December 2022.
Total workers in the beginning of the month were 3800, whereas at the end of the month
were 4200. During the month, 50 workers left the firm on account of their own
problems while 80 workers were discharged. 560 workers were engaged during the
month in various departments. But out of them, only 60 were appointed. (10 Marks)

Ans 2.

Introduction

Labor turnover, often simply referred to as turnover, is a crucial metric for businesses,
especially those in industries where human capital is a significant asset. It measures the rate
at which employees leave an organization and are replaced by new hires. A high turnover rate
can be indicative of problems within the company, such as dissatisfaction among employees
or issues with the company's management practices. Conversely, a low turnover rate can
suggest that employees are content and see long-term potential in their roles. However, it's
essential to note that turnover can be both voluntary (e.g., an employee resigning) and
involuntary (e.g., an employee being discharged). In the context of Manas Ltd.,
understanding labor turnover is vital to gauge the company's health and its ability to retain
talent. The data provided offers insights into the workforce dynamics of the company for
December 2022.

Concept and application

Labor turnover is a critical metric that reflects the rate at which employees enter and exit an
organization. It provides a quantitative measure of the stability of the workforce and can be
an indicator of the overall health of an organization. To understand labor turnover in depth,
it's essential to delve into its various methods of measurement and the implications of each.

1. Methods of Measuring Labor Turnover:

There are several methods to calculate labor turnover, each providing a different perspective
on workforce dynamics:

a. Separation Method: This method focuses on the number of employees who left the
organization, whether voluntarily or involuntarily.

The formula is:

Turnover Rate (Separation Method) =

Number of Separations duringthe period

Turnover Rate= x 100
Average Number of Employees during the period

b. Replacement Method: This method considers the number of new employees hired to
replace those who left. The formula is:

Turnover Rate (Replacement Method) =

Number of Replacements during the period ​

Turnover Rate= x 100
Average Number of Employees during the period
c. Flux Method: This method combines both separations and replacements to provide a
comprehensive view of labor movement. The formula is:

Turnover Rate (Flux Method)

Number of Separa tions + Number of Replacements ​

Turnover Rate= x 100
2× Average Number of Employees during the period

2. Application to Manas Ltd.:

Given the data for Manas Ltd., we can compute the labor turnover using the above methods:

Average Number of Employees during December 2022 =

Turnover Rate=¿ ¿

Using the Separation Method:

50 ( leftvoluntarily ) +80(discharged)​
Turnover Rate= x 100=3.25 %
4000

Using the Replacement Method:

60(appointed)
Turnover Rate= x 100=1.5 %
4000

Using the Flux Method:

50+80+60
Turnover Rate= x 100=4.75 %
2× 4000
3. Implications of Labor Turnover:

 Cost Implications: High turnover can be expensive for organizations. Costs include
recruitment, training, and the lost productivity during the transition period. For Manas
Ltd., hiring 560 workers and appointing only 60 indicates potential inefficiencies in
the recruitment process.
 Operational Implications: A constantly changing workforce can disrupt operations.
New employees might take time to adapt to the company's processes, leading to
reduced efficiency and potential errors.
 Morale and Culture: High turnover can affect the morale of existing employees. It
can create uncertainty and reduce the sense of camaraderie among workers. For
Manas Ltd., the fact that 80 workers were discharged in a single month might raise
concerns among the remaining employees about job security.
 Knowledge and Skills: Losing experienced employees means losing their
accumulated knowledge and skills. New hires might not possess the same level of
expertise, leading to a potential skills gap.

4. Analyzing the Causes:

Understanding the reasons behind labor turnover is crucial. In the case of Manas Ltd., 50
workers left due to personal reasons, which might be outside the company's control.
However, 80 workers were discharged, which could indicate performance issues, strict
management policies, or other internal problems.

5. Addressing Labor Turnover:

To manage and reduce labor turnover, organizations should:

 Engage in Regular Feedback: Regular feedback sessions can help address employee
concerns and grievances before they escalate.

 Offer Competitive Compensation: Ensuring that employees are compensated fairly

for their roles can reduce the incentive to look for opportunities elsewhere.
  Provide Growth Opportunities: Employees are more likely to stay if they see a
clear path for career advancement within the organization.

 Foster a Positive Work Environment: A supportive and inclusive work

environment can boost employee satisfaction and reduce turnover.

In conclusion, labor turnover is a complex metric influenced by a myriad of factors. For

Manas Ltd., understanding and addressing the root causes of turnover is essential to ensure
the company's long-term success and stability.

Conclusion

In conclusion, labor turnover is a multifaceted metric that provides valuable insights into the
internal dynamics of an organization. For Manas Ltd., the figures from December 2022 offer
a snapshot of the company's workforce stability during that period. By analyzing the reasons
for turnover, whether voluntary or involuntary, businesses can implement strategies to
improve employee retention and satisfaction. It's also worth noting that while turnover can
sometimes be viewed negatively, a certain level of turnover can be beneficial. It can bring in
fresh perspectives and skills, fostering innovation and growth. However, excessively high
turnover can be costly and disruptive. Therefore, companies like Manas Ltd. must strike a
balance, ensuring that they maintain a stable workforce while also being open to new talent
and ideas. The key is to understand the underlying causes of turnover and address them
proactively.

Q3. A product sells at Rs. 3 per unit. The company uses a first-in-out actual costing
system. A new fixed manufacturing overhead allocation rate is computed each year by
dividing the actual fixed manufacturing overhead cost by the actual production. The
following data is available for the first two years:

Year 1 Year 2
Sales (Units) 1500 1800
Production (Units) 2100 1500
Cost: (Rs.) (Rs.)
Variable Manufacturing 1050 750
Fixed Manufacturing 1050 1050
Variable Marketing and Administration 1500 1800
Fixed Marketing and Administration 600 600

Prepare Income Statement for each year based on:

a. Absorption Costing (5 Marks)

Ans 3a.

Introduction

Costing systems are essential for businesses to determine the cost of their products and
subsequently, their profitability. Absorption costing, also known as full costing, is a method
where all manufacturing costs, both variable and fixed, are attributed to the product. This
approach contrasts with variable costing, where only variable costs are included in product
costs. In absorption costing, fixed manufacturing overheads are spread over the units
produced, making the cost per unit more comprehensive. Using the provided data for a
product over two years, we will prepare an income statement for each year based on
absorption costing.

Concept and application

Absorption Costing:

Under absorption costing, the cost of a product includes direct materials, direct labor, variable
manufacturing overhead, and a portion of fixed manufacturing overhead. The fixed
manufacturing overhead is spread over the units produced, resulting in a per-unit cost.

Income Statement Calculation:

Year 1:

1. Cost per Unit:

Variable Manufacturing Cost per Unit = Rs. 1050 / 2100 units = Rs. 0.5 per unit

Fixed Manufacturing Overhead per Unit = Rs. 1050 / 2100 units = Rs. 0.5 per unit

Total Manufacturing Cost per Unit = Rs. 0.5 + Rs. 0.5 = Rs. 1 per unit
2. Cost of Goods Sold (COGS):

COGS = Sales Units x Total Manufacturing Cost per Unit = 1500 units x Rs. 1 = Rs. 1500

3. Total Operating Expenses:

Variable Marketing and Administration = Rs. 1500

Fixed Marketing and Administration = Rs. 600

Total Operating Expenses = Rs. 2100

4. Net Income:

Total Sales = 1500 units x Rs. 3 = Rs. 4500

Net Income = Total Sales - (COGS + Total Operating Expenses) = Rs. 4500 - (Rs. 1500 + Rs.
2100) = Rs. 900

Year 2:

1. Cost per Unit:

Variable Manufacturing Cost per Unit = Rs. 750 / 1500 units = Rs. 0.5 per unit

Fixed Manufacturing Overhead per Unit = Rs. 1050 / 1500 units = Rs. 0.7 per unit

Total Manufacturing Cost per Unit = Rs. 0.5 + Rs. 0.7 = Rs. 1.2 per unit

2. Cost of Goods Sold (COGS):

COGS = Sales Units x Total Manufacturing Cost per Unit = 1800 units x Rs. 1.2 = Rs. 2160

3. Total Operating Expenses:

Variable Marketing and Administration = Rs. 1800

Fixed Marketing and Administration = Rs. 600

Total Operating Expenses = Rs. 2400

4. Net Income:
Total Sales = 1800 units x Rs. 3 = Rs. 5400

Net Income = Total Sales - (COGS + Total Operating Expenses) = Rs. 5400 - (Rs. 2160 + Rs.
2400) = Rs. 840

Conclusion

Absorption costing provides a holistic view of product costs by including both variable and
fixed manufacturing overheads. The income statements for the two years highlight the impact
of production levels on the allocation of fixed overheads per unit. In Year 2, despite higher
sales, the net income is slightly lower than Year 1 due to the reduced production leading to a
higher per-unit allocation of fixed manufacturing overhead. This underscores the importance
of understanding costing methods, as they can significantly influence reported profitability.
Businesses must be aware of these nuances to make informed decisions and interpret
financial results accurately.

b. Variable Costing (5 Marks)

Ans 3b.

Introduction

Variable costing, also known as direct costing or marginal costing, is a method in which only
variable costs are included in the product costs. Fixed manufacturing overheads are treated as
period costs and are expensed in the period they are incurred, rather than being spread over
the units produced. This approach provides a clear distinction between the costs that vary
with production and those that remain constant. Using the data provided for a product over
two years, we will prepare an income statement for each year based on variable costing.

Concept and application

Variable Costing:

Under variable costing, the cost of a product includes direct materials, direct labor, and
variable manufacturing overhead. Fixed manufacturing overheads are not included in the
product costs but are instead deducted from the total sales in the period to determine the net
income.

Income Statement Calculation:

Year 1:

1. Cost per Unit:

Variable Manufacturing Cost per Unit = Rs. 1050 / 2100 units = Rs. 0.5 per unit

2. Cost of Goods Sold (COGS):

COGS = Sales Units x Variable Manufacturing Cost per Unit = 1500 units x Rs. 0.5 = Rs.
750

3. Total Operating Expenses:

Variable Marketing and Administration = Rs. 1500

Fixed Marketing and Administration = Rs. 600

Total Operating Expenses = Rs. 2100

4. Net Income:

Total Sales = 1500 units x Rs. 3 = Rs. 4500

Net Income = Total Sales - (COGS + Total Operating Expenses + Fixed Manufacturing
Overhead) = Rs. 4500 - (Rs. 750 + Rs. 2100 + Rs. 1050) = Rs. 600

Year 2:

1. Cost per Unit:

Variable Manufacturing Cost per Unit = Rs. 750 / 1500 units = Rs. 0.5 per unit

2. Cost of Goods Sold (COGS):

COGS = Sales Units x Variable Manufacturing Cost per Unit = 1800 units x Rs. 0.5 = Rs.
900
3. Total Operating Expenses:

Variable Marketing and Administration = Rs. 1800

Fixed Marketing and Administration = Rs. 600

Total Operating Expenses = Rs. 2400

4. Net Income:

Total Sales = 1800 units x Rs. 3 = Rs. 5400

Net Income = Total Sales - (COGS + Total Operating Expenses + Fixed Manufacturing
Overhead) = Rs. 5400 - (Rs. 900 + Rs. 2400 + Rs. 1050) = Rs. 1050

Conclusion

Variable costing offers a perspective that emphasizes the costs directly associated with
production, excluding fixed manufacturing overheads from product costs. The income
statements for the two years reveal the direct impact of sales and variable costs on
profitability, without the influence of fixed manufacturing overhead allocation. This method
can be particularly useful for internal decision-making, as it clearly delineates costs that can
be controlled at the production level. However, it's essential for businesses to understand the
differences between absorption and variable costing, as the choice of method can
significantly impact reported profits and influence strategic decisions.