Taxmann’s Cost & Management Accounting | CRACKER

Contents % ' !

0

Chapter-wise Marks Distribution

I-5

Previous Exams Trend Analysis (May 2018 onwards) New Syllabus

I-7

1

G N I T N U O C C !

T N E M E G A N A D N A T S O # O T N O I T C U D O R T N )

CHAPTER

2

T S O # L A I R E T A -

CHAPTER

2.1

3

T S O # E E Y O L P M %

CHAPTER

3.1

4

D O H T E G N I T S O # N O I T P R O S B !

S D A E H R E V /

CHAPTER

6.1

7

M E T S Y 3 G N I T N U O C C !

T S O #

CHAPTER

7.1

8

G N I T S O # H C T A " D N A T I N 5

CHAPTER

5.1

6

T E E H 3 T S O #

CHAPTER

4.1

5

G N I T S O # D E S A " Y T I V I T C !

CHAPTER

1.1

I-13

8.1

3 4 . % 4 . / #

I-14

% ' !

0

G N I T S O # S S E C O R 0

S T C U D O R 0 Y "

S T C U D O R 0 T N I O * G N I T S O # E C I V R E 3

G N I T S O # D R A D N A T 3

G N I T S O # L A N I G R A -

L O R T N O # Y R A T E G D U " D N A T E G D U "

15.1

14.1

13.1

12.1

11.1

10.1

9.1 G N I T S O # T C A R T N O # D N A B O *

15

CHAPTER

14

CHAPTER

13

CHAPTER

12

CHAPTER

11

CHAPTER

10

CHAPTER

9 CHAPTER

S R E W S N !

D E T S E G G U 3

Y L U *

S R E W S N !

D E T S E G G U 3

R E B M E C E $

R E P A 0 D E V L O 3

S R E W S N !

D E T S E G G U 3

Y A -

P.48 R E P A 0 D E V L O 3

P.24

R E P A 0 D E V L O 3

P.1

H C A E R O F T S O C R O T U P N I E C R U O S E R E H T E S Y L A N A G N I T E G D U " D E S A "

YY T T I I V V I I T T C C !A

D E R I U Q E R S E C R U O S E R F O T N U O M A E H T G NY I T T I A V I MT IC T A S E F RO OL F E KV RE OL WD E ET ME G AD R F U AB SE E H DT I V R OE RP PS TA ) Ans.

D N A S N A L P L A I C N A N I F E C U D O R P O T S S E C O R P # " !

E H T F O G N I S R E V E R E H T S T SE I G "D "U !B

S W O L L O F S A E R A G N I T S O C L A N O I T I D A R 4 D N A # " !

N E E W T E B E C N E R E F F I D L A T N E M A D N U &

Ans.

D IN N AA GD R A OO L EK HR T O FW O T SS E I A T C I V E I R T O C F AT DE EE T M C ET PA XH ET T EE HG T D GU NB I L E L O V I RT T C N OE F CF

DEL S T NS A AO O GCG NAC I I EG N V NI E RT AE L A P R DT S S NOD ATE ENE O I MT R G AA TS )

-

S E V I T C E J B O E H T T R O P P U S O T S K E E S H C I H W M E T S

Y T S N LE O RM T E N V OO CR DP NM AI GS NU I O N U NN AI L T P N AO SC I F TO )

HP T E O R BC

S SE TI H DC GRR I L OU H J O GAS I E MR H OHF T T O I SW Y T L L S P U E SI P E T U I R S V DI N ETI C T AN E GEI O DST UOC BHU T D H E S T I R M WR L A DET I ETN L R A E A I T PC O MNP A ON R O CI F EFT BNE NOG AND CDU SNB T A L M L U A SI O E R CF R LNS A A E NI UI C T FN C NA !I

ACTIVITY BASED COSTING

5

CHAPTER

THEORY QUESTIONS

[CA Inter Nov. 2018, 5 Marks] Q1. Explain Activity Based Budgeting.

-

Q2. What is the fundamental difference between Activity Based Costing System (ABC) and Traditional Costing System? Why more and more organisations in both the manufacturing and non-manufacturing industries are adopting ABC? [CA Inter November 2007, 10 Marks]

T R A P E D

S R E T N E C T S O C O T D E T A L E R E R S A T N (E /M

-

O T N I D E P U O R G S E I T I V I T C A O T D E T A L E S L R O EO R P A T S (O /C

Traditional Absorption Costing

Activity Based Costing

E C N E H D N A

SR R U E T O I N V EA CH TE S OB CT OS T O DC EF T O A L C E I R T S EL I R A A E SR T S T OO #N E C N E H D N A S E I T I V I T C A O T

C DT I ES T I A L L A E E R R EE R R A O SM T S E OR #A

.

TS

S T ON CE YM L N T OR A EP HE T ED BL L OA T N DI ET MS UO SC S G A N SI I N R SE R UV OO (G R EE V MI R ID 4

D E N I M R E T E D E R A S R E V I R $ T S O # E S I W Y T I V I T C !

5.1

' . ) 4 3 / # $ % 3 ! " 9 4 ) 6 ) 4 # !

5.2

Traditional Absorption Costing

SD E A T E A H R R YE R V E O VE OL CG EN

R ID DSE ARS EOU HTE RN B E VEY OMA T M R EA L E P PT I TEA L DR U Y MHR C E AV RE E O HRC T OE I F % R

ER R E A V SO E E T L A G R N I YS R E F VO OT CP EE R C N EO S

I E WCT OA YNR T I Y SR V I I E T EV C R O AE C CHE l4R I D C D EE A PS E 3UH

Activity Based Costing

-

O T

S T I N 5 T S S OR #U O OH T R DO ES NB GO I SJ S R A O ES R T A C U SD T S O OR #P

S GL

E E N SN T A C H EC J B N /O I T TU

S C BT OI #T RE S ST OI T DN DSE EEM C T NI R G VA IR S P EE S S A SD ER S R ET A C MU SOD T TO S S OU R #C P

i.e.

L O MR IT L E N EO BC TS T O O NC NR AO CF S E TL N B EA T MI TU R S A PT EO DN E S C R N E E T N ( E D #E TT S OA #N I T D DES NE RO AT C A OS DN SD EI L I lMAA I I L E# L P E R MEA " IB S S! T E ENS C BAO N NCCE AS ( CEG I N T I SI D D V E E I I NZ T T C OI I V APM I SI T CYEN ARRI A R S LS OM A C L I

E T O C DR N ESE T EN UCN S NHUO S %U4DC -

-

PRACTICAL QUESTIONS Q1. A company manufacturing two products furnishes the following data for a year: Product Annual Output (Units)

Total Machine hours

Total number of purchase orders

Total number of set-ups

A

5,000

20,000

160

20

B

60,000

1,20,000

384

44

The annual overheads are as under: Volume related activity costs ` 5,50,000 Set up related cost

` 8,20,000

Purchase related costs

` 6,18,000

You are required to calculate the cost per unit of each Product A and B based on: (i) Traditional method of charging overheads (ii) Activity based costing method.

[CA November 2002, 9 Marks]

Ans. (i) Statement showing overhead cost per unit (based on traditional method of charging overheads) Products

Overhead Cost per unit S T I N U

S T I N U

"

Overhead cost Component (W.N.1)

Total Machine Hours

!

Annual Output (units)

`

`

u`

u`

`

`

' . ) 4 3 / # $ % 3 ! " 9 4 ) 6 ) 4 # !

5.3

S D A E H R E V / L A U N N !

L A T O 4 S R U O ( E N I H C A L A T O 4

G N I B R O S B A R OS F D EA T E A H 2R RE UV OO ( E N I H C A -

R U O H R E P

`

(ii) Statement showing overhead cost per unit (based on Activity Based Costing method) Costs

S T I N U

S T I N U

T U P T U / L A U N N !

`

T I N U R E P T S O #

`

`

S T S O # L A T O 4

`

`

`

`

`

`

E S A H C R U P S FR O E D O R .O

D E T A L E R E S A H CT R S UO 0C

`

S P U T E 3 F O

O .

T S O C D E T A L E R P U T E 3

`

`

Product B

`

Product A

Cost Driver Rate

S R U O ( E N I H C A -

D E T S A T L S E O 2C EY T MI V UT I L O C 6!

Basis of absorption

Calculation of Cost Driver Rates Cost Pool

Cost Driver

Cost (`)

Cost Driver Rate (`)

E S A H C R U P FS O R E D O R .O

S P U T E S F O

O .

S T S O # D E T A L E 2 E S A H C R U 0

S R U O H E N I H C A -

S T S O # D E T A L E 2 P U T E 3

Y T I V I T C !

D E T A L E 2 E M S UT L S O O 6C

Activity Volume

Q2. RST Limited specializes in the distribution of pharmaceutical products.

It buys from the pharmaceutical companies and resells to each of the three different markets: (i) General Supermarket Chains (ii) Drugstore Chains (iii) Chemist Shops The following data for the month of April, 2020 in respect of RST Limited has been reported: General Supermarket Chains

Drugstore Chains

Chemist Shops

Average revenue per delivery

` 84,975

` 28,875

` 5,445

Average cost of goods sold per delivery

` 82,500

` 27,500

` 4,950

` 330

` 825

` 2,750

Number of deliveries

' . ) 4 3 / # $ % 3 ! " 9 4 ) 6 ) 4 # !

5.4

In the past, RST Limited has used gross margin percentage to evaluate the relative profitability of its distribution channels.

The company plans to use activity-based costing for analysing the profitability of its distribution channels.

The Activity analysis of RST Limited is as under: Activity Area

Cost Driver

Customer purchase order processing

Purchase orders by customers

Line-item ordering

Line-items per purchase order

Store delivery

Store deliveries

Cartons dispatched to stores

Cartons dispatched to a store/delivery

Shelf-stocking at customer store

Hours of shelf-stocking

The April, 2020 operating costs (other than cost of goods sold) of RST Limited are ` 8,27,970. These operating costs are assigned to five activity areas.

The cost in each area and the quantity of the cost allocation basis used in that area for April, 2020 are as follows: Activity Area

Total Costs in April, 2020

Total Units of Cost Allocation Base used in April, 2020

Customer purchase order processing

` 2,20,000

5,500 orders

Line-item ordering

` 1,75,560

58,520 line items

Store delivery

` 1,95,250

3,905 store deliveries

Cartons dispatched to stores

` 2,09,000

2,09,000 cartons

` 28,160

1,760 hours

Shelf-stocking at customer store

Other data for April, 2020 include the following: Supermarket Chains Total number of orders Average number of line items per order

Chains

Shops

385

990

4,125

14

12

10

Total Number of Store deliveries

330

825

2,750

Average Number of Carton shipped per store delivery

300

80

16

Average Number of hours of shelf - stocking per store delivery

3

0.6

0.1

Required: (i) Compute the April 2020 gross-margin percentage for each of its three distribution channels and compute RST Limited’s operating income.

' . ) 4 3 / # $ % 3 ! " 9 4 ) 6 ) 4 # !

5.5

(ii) Compute the April, 2020 rate per unit of the cost-allocation base for each of the five activity areas. (iii) Compute the operating income of each distribution channel in April 2020 using the activity-based costing information. Comment on the results. What new insights are available with the activity-based cost information? (iv) Describe four challenges one would face in assigning the total April, 2020 operating costs of ` 8,27,970 to five activity areas.

[CA May 2004, 12 Marks] Ans. (i) Statement of operating income and gross margin percentage for each of its 3 distribution channel: Drug Store Chains

Chemist Shops

Total

`

S D O O G F O T S O #

S D S L E O ,S

`

u

u

`

u

`

u

`

-

`

`

`

`

u

T A R E P O R E H T T S /O # S S G E N ,I

`

N I G R A S S O R '

u

`

`

`

E U N E V E 2

General Super Market Chains

E M O C N I G N I T A R E P /

N I G R A M S S O R '

`

E M O C N I G N I T A R E P /

(ii) Computation of rate per unit of the cost allocation base for the 5 activity areas for April 2020: S R E D R O

S R E D R O

G N I S S E C O R P R E D R O E S A H C R U 0 R E M O T S U #

`

S M E T I E N I L

G N I R E D R O M E T I E N I ,

R E D R O S M E T I E N I L

S E I R E V I L E D E R O T S

Y R E V I L E D E R O T 3

Y R E V I L E D

H C T A P S I D

D E H C T A P S I D

D E H C T A P S I D S N O T R A #

R U O H

S R U O H

E R O T S R E M O T S U C T A G N I K C O T S F L E H 3

S N I A H C T E K R A M R E P U 3 L A R E N E '

S N I A H # E R O T 3 G U R $

S P O H 3 T S I M E H #

S RR OE D

S R E D R O

S R E D R O

S R E D R O

MG EN T I I R E ED NR I , O

S V L I E E I R D E

S V I E LR E I D E

S E R I E V I L E D

Y R E V I L E D E R O T 3

S E SR I N T OE R V I L AE CD

S IG L VR E D AH

S E I R E V

RS S E R SE I H N V OR I

LG E TE V R V DA I L A E CD

S

E I

S R SH E I R

G E V VA I L E D

S E R I E SV I NE L OD T R A C

S I D SD NE OH T C R T A A #P

G N I K C O T S F L E H 3

-

S R E D R O

S R E D R O

R U 0RG E DN RR E I S M/S E OEC T S S A O UH R #C 0

u u

`

u

u

`

AIS RI ST S E ST I S E UDK SOR P A OWM HTE 3RS E HE TT S H I T MOS E EH S HT O R #NC EAA HS HT T E WEU OUN HNE E V SVE E T R R H O GRT I ES L PT H GSS I EO H CC NRG OUN I OT I T S A A E R MR E RSP

O O F D N T F I O T,O S I O4T C3A D22 EFS

O S L A TE BN N UN YO T A I H M V I AC T C N ARO E I GT ER HA U 4L B

u

u

`

u

u

u

-

u

`

-

u

`

u

`

`

u

u

`

`

u

`

u

u

`

u

u

`

-

u ` u u

`

Chemist Shops (`)

Drug Store Chains (`)

General Super Markets Chains (`)

` ` -

u

u

-

E M O C N I G N I T A R E P /

N I

E M O C N I G N I T A R E P /

.

7 R E F E 2

T S O C G N I T A R E P /

`

Chemist Shops Drug Store Chains General Super Market Chains

N I G R A S S O R '

u

` `

u

`

`

u

`

`

' . ) 4 3 / # $ % 3 ! " 9 4 ) 6 ) 4 # !

5.6

(iii) Operating Income Statement of each distribution channel in April, 2020 (using ABC Information):

Comments and new insights:

-

Working Note:

Computation of operating cost of each distribution channel

T S O C G N I T A R E P /

' . ) 4 3 / # $ % 3 ! " 9 4 ) 6 ) 4 # !

5.7

A E R A Y T I V I T C A R O F R E V I R D T S O C E T A I R P O R P P A N A G N I S O O H #

(iv) Challenges faced in assigning total operating cost of ` 8,27,970:

L A R E V E S S S O R C A N O M M O C E B Y A M T A H T S T S O C E L D N A H O T W O H S GE NI I T I D V I I C T EC $A

R E V I R D T S O C N E S O H C E H T R O F E S A B A T A D E L B A I L E R A G N I P O L E V E $

R E V I R D T S O C R E P S E T A R T S O C E T U P M O C O T D O I R E P E M I T E H T F O E C I O H #

S R O T C A F L A R U O I V A H E "

Q3. MNP suits is a ready-to-wear suit manufacturer. It has four customer wholesale-channel customers and two retail-channel customers. MNP suits has developed the following activity-based costing system: Activity Order processing Sales visits

Cost Driver

Rate in 2021

Number of purchase order

1,225 per order

Number of customer visits

7,150 per visit

Delivery-regular

Number of regular deliveries

1,500 per delivery

Delivery rushed

Number of rushed deliveries

4,250 per delivery

List selling price per suit is 1,000 and average cost per suit is 550.

The CEO of MNP suits wants to evaluate the profitability of each of the four customers in 2020 to explore opportunities for increasing profitability of his company in 2021. The following data are available for 2020: Items

Wholesale Customers W

Retail Customers

H

R

T

Total number of orders

44

62

212

250

Total number of sales visits

8

12

22

20

Regular deliveries

41

48

166

190

Average number of Rush deliveries

3

14

46

60

400

200

30

25

` 700

` 800

` 850

` 900

Average No. of suits per order Average selling price per suit

Required: (i) Calculate the customer-level operating income in 2020 (ii) What do you recommend to CEO of MNP suits to do to increase the Company’s operating income in 2021? (iii) Assume MNP suits’ distribution channel costs are ` 17,50,000 for its wholesale customers and ` 10,50,000 for the retail customers. Also, assume that its Corporate sustaining costs are ` 12,50,000. Prepare Income statement of MNP suits for 2021.

[CA November 2004, 10 Marks]

' . ) 4 3 / # $ % 3 ! " 9 4 ) 6 ) 4 # !

5.8

Ans.

(i) Computation of Customer level operating income in 2020:

n

n

N I G R A S S O R '

LT S E S VO EC L RG E N MI T OA T R S E UP #O

E M LO E C VN EI L RG E N I MT A OR T E S UP #/

V ET L S RO E C MG ON T I S T UA R CE LP A T O O L 4E

G N I S S E C O R P R E D R /

S T I S I V S E L A 3

Y R E V I L E $ R A L U G E 2

E L SA ME LO U E T VCUC N N EI EA L VT RGE A E NR I MT FES OAOME R T OC

E S I CR UPSN #/A IP

D E H S U R N O EY S R NE EV I PL XE %D

u u

D L O S S D O O G F O T S O #

u

-

u

L A U T C A T A E U N EE VI C ER 2P

u

u

u u

n

n

T N U O C S I $

u

u

u u

E C I R P T A

S E U N E VT ES I 2L

E L A S E L O H W E H T Y B Y L L A I C E P S E G N I T N U O C S I D E C I R P F O

L E 7 V@ ER L EE CM O UT DS EU 2C

S R E M O T S U C L I A T E R Y B Y L L A I C E P S E

S T S O C L E V E L R E M O T S U # F O L E V E L E C U D4 E 22

E H T G N I D R A G E R S A E R A M E L B O R P E H T F O E M O S S SA T H H GC I L U H G3 I

H 4 D MN EA T S 2 Y S S R TE S OM CO T #S "U !C

S R E D R O F O R E B M U N H G I H

u

u

u u

u

u

u

u

u

u

u

u

u

u

u

u

u

u

u

u

u

u

u

u

u

u u

u

T R H W

Retail Customer Whole Sale Customer

(ii) The key challenges that may be faced by CEO:

' . ) 4 3 / # $ % 3 ! " 9 4 ) 6 ) 4 # !

5.9

S T I S I V R E M O T S U C F O R E B M U N H G I H

S E I R E V I L E D D E H S U R F O R E B M U N H G I H

E B N A C Y T I V I T C A F O L E V E L

HS GE I U H N SE I V H E T R RR E HE T M E O HT S WU RC E G DN I S I NC OU CD E OR T T SU DO EH EI T NW /D %E #C U ED HE 4R

(iii) Income Statement of MNP suits for 2020: Retail Customers

Total

E M O C N I G N I T A R E P O L E V E L L E N N A H C N O I T U B I R T S I $

T S O C L E N N A H C N O I T U B I R T S I $

S S E ,

E M O C N I G N I T A R E P O L E V E L R E M O T S U #

Whole Stale Customer

T S O C G N I N I A T S U S E T A R O P R O #

S S E ,

E M O C N I G N I T A R E P /

Q4. ABCD Co. Ltd. produces and sells four products A, B, C and D. These products are similar and usually produced in production runs of 10 units and sold in a batch of 5 units. The production details of these, products are as follows: Products

A

B

C

D

100

110

120

150

Direct material (`)

30

40

35

45

Direct labour (`)

25

30

30

40

Machine hour (per unit)

5

4

3

4

Production (units) Cost per unit:

The production overheads during the period are as follows: Factory works expenses Stores receiving costs Machine set up costs

` 22,500 ` 8,100 ` 12,200

Cost relating to quality control

` 4,600

Material handling and dispatch

` 9,600

` 57,000

The cost drivers for these overheads are detailed below: Cost

Cost drivers

Factory works expenses

Machine hours

Stores receiving costs

Requisitions raised

Machine set up costs

No. of production runs

Cost relating to quality control

No. of production runs

Material handling and dispatch

No. of orders executed

' . ) 4 3 / # $ % 3 ! " 9 4 ) 6 ) 4 # !

5.10

The number of requisitions raised on the stores was 25 for each product and number of orders executed was 96, each order was in a batch of 5 units.

Required:

(i) Total cost of each product assuming the absorption of overhead on machine hour basis;

(ii) Total cost of each product assuming the absorption of overhead by using activity base costing; and (iii) Show the differences between (i) and (ii) and comments.

[CA May 2005, 12 Marks] Ans.

(i) Statement showing total cost of each product by absorbing overheads on machine hour rate basis:

u

S T I N U

T U P T U /

`

T I N U R E P T S O # L A T O 4

` R E P

R U O DH AE EN HI RH EC VA /M `

T S O # L A T O 4

`

R U O B A L T C E R I $ S T S O C T I N 5

S E S N E P X E S K R O W Y R O T C A F T S O C T I N 5

T S O C G N I V I E C E R E R O T S S T S O C T I N 5

T S O C T I N 5

S N U R N O I T C U D O R P F O

O .

N O I T I S I U Q E R S E R O T S F O

O .

S R E D R O S E L A S F O

O .

S T I N 5

T U P T U /

P U T E S E N I H C A -

L A I R E T A M T C E R I $ S T S O C T I N 5

D

C

E N I H C AR MH

S R H

S R H E N I H C A M L A T O 4

S T S O C D A E H R E V O L A T O 4

R E V O R U O HE T EA N2 I H D CA AE -H

B

Total

A

R U O B A , T C E R I $

`

`

`

u

` u

`

L A I R E T A T C E R I $

`

`

-

u

Total D C B

A

(ii) Statement showing total cost of each product by absorbing overheads on activity based cost method:

' . ) 4 3 / # $ % 3 ! " 9 4 ) 6 ) 4 # !

T S O C T I N 5

T S O C L A T O 4

A M R E P S PR XU EO YH R OE T N C I AH &C

Total Production overhead and Production OH/Cost driver: S E S N E P X E S K R O W Y R O T C A &

T S O C G N I V I E C E R S E R O T 3

T S O C G N I V I E C E R S E R O T 3

S T S O C P U T E S E N I H C A -

Y T I L A U Q O T G N I T A L E L R O ST R T S N OO #C

I L A U Q O T G N I T L A O L E R T R N SO T S C OY #T

EH T A C T MA P OS T I GD N I T A G L N E I R L D EN S NA EH PL A XI %R

O T G GN I NL I D T A N L A E H R LH EA S C IT NR A EEP PTS XAI %MD

S T S O C P U T E S E N I H C A -

L A T O 4

D

# " !

T S O C T I N 5

E C N E R E F F I $ T S O C T I N 5

# " !

T S O C L A T O 4

2 ( T S O C T I N 5

2 ( T S O # L A T O 4

C B

A

G N I L D N A ( L A I R E T A -

-

E R O M Y L E V I T A R A P M O C S E M U S N O C

! @ T A H T S W O H S SS

I S R Y U L A O NH AE EN VI OH BC AA EHF 4O

S T S O C T C

UG N DI OT RS PO TC N L A EN R E O F I F T I I D D A SR E T VG I G N I GS I NL I I T T S OU CY DB T EA S A D BE V YI T R I V R I A T C E AR FE O W ET S A UH EW HN T A NH /T

SI C I F H I T C E NP I S EH S UT AI CW ED BI E F #T I "N !E D GI NN I E S E UB YE BV A EH S I D C EA R E PH R EE R V OO MN O SI I T TP S R OO CS B TA C UF DOS ODI E RO T PH I V I ETT HEC 4MA

17,00,000

Boat engine

# 1 T S O C T I N 5

-

Total D C B A

5.11

(iii) Statement showing Difference between (i) and (ii) :

Q5. An engine manufacturing company has two production departments: (i) Snow mobile engine and (ii) Boat engine and two service departments: (i) Maintenance and (ii) Factory office.

Budgeted cost data and relevant cost drivers are as follows:

Departmental costs:

`

Snow mobile engine

6,00,000

' . ) 4 3 / # $ % 3 ! " 9 4 ) 6 ) 4 # !

5.12

` Factory office

3,00,000

Maintenance

2,40,000

Cost drivers: Factory office department:

No. of employees

Snow mobile engine department

1,080

Boat engine department

270

Maintenance department

150 1,500

Maintenance department:

No. of work orders

Snow mobile engine department

570

Boat engine department

190

Factory office department

40 800

Required: (i) Compute the cost driver allocation percentage and then use these percentages to allocate the service department costs by using direct method. (ii) Compute the cost driver allocation percentage and then use these percentages to allocate the service department costs by using non-reciprocal method/step method.

[CA May 2005, 5 Marks] Ans. (i) Direct Method: Cost Driver Allocation Percentage:

L A T O 4

E N I G N E T A O "

E N I G N E E L I B O M W O N 3

Number of work orders

% used

E N I G N E T A O " Maintenance dept.

No. of employees

E N I G N E E L I B O M W O N 3

Factory office dept.

' . ) 4 3 / # $ % 3 ! " 9 4 ) 6 ) 4 # !

5.13

Service Department Allocation: Boat engine

Snowmobile engine

Maintenance dept.

T S O # L A T N E M T R A P E $

Factory office dept.

S T S O # D E T A C O L L !

T P E D E C l F O Y R O T C A &

L A T O 4

T P E D E C N A N E T N I A -

(ii) Step Method: Cost Driver Allocation Percentage: % used

E N I G N E T A O "

T P E D E C N A N E T N I A -

Work order

% used

E N I G N E T A O "

E N I G N E E L I B O M W O N 3

Maintenance dept.

Number of employees

E N I G N E E L I B O M W O N 3

Factory office dept.

Service Department Allocation: Boat engine

S T S O # D E T A C O L L !

Snowmobile engine

Maintenance dept.

S T S O C L A T N E M T R A P E $

Factory office dept.

E C l F O Y R O T C A &

T P E D E C N A N E T N I A -

T S O # L A T O 4

Q6. ABC Limited manufactures two radio models, the Nova which has been produced for five years and sells for 900, and the Royal, a new model introduced in early 2004, which sells for 1.140. Based on the following Income statement for the year 2020-21, a decision has been made to concentrate ABC Limited’s marketing resources on the Royal model and to begin to phase out the Nova model.

ABC Limited Income statement for the year ending March 31, 2021

' . ) 4 3 / # $ % 3 ! " 9 4 ) 6 ) 4 # !

5.14

Royal Model

Nova Model

Total

Sales

45,60,000

1,98,00,000

2,43,60,000

Cost of Goods sold

31,92,000

1,25,40,000

1,57,32,000

Gross margin

13,68,000

72,60,000

86,28,000

Selling & Administrative Expenses

9,78,000

58,30,000

68,08,000

Net Income

3,90,000

14,30,000

18,20,000

Unit Produced and sold

4,000

22,000

Net Income per unit sold

97.50

65

The standard unit costs for the Royal and Nova models are as follows: Royal Model Direct materials

Nova Model

584

Direct Labour Royal (3.5hours u 12) Nova (1.5 hours u 12)

42

Machine usage Royal (4 hours u 18) Nova (8 hours u 18)

72

208

18

144

Manufacturing overheads (applied on the basis of machine hours at a predetermined rate of 25 per hour)

100

200

Standard Cost

798

570

ABC Ltd.’s Controller is advocating the use of activity-based costing a activity-based cost management and has gathered the following information about the company’s manufacturing overheads cost for the year ending March 31, 2021.

Activity center

Traceable costs

Royal

Nova

Total

Soldering (Number of solder joints)

9,42,000

3,85,000

11,85,000

15,70,000

Shipments (Number of shipments)

8,60,000

3,800

16,200

20,000

Quality control (Number of inspections)

12,40,000

21,300

56,200

77,500

Purchase orders (Number of orders)

9,50,400

1,09,980

80,100

1,90,080

Machine Power (Machine hours)

57,600

16,000

1,76,000

1,92,000

Machine setups (Number of setups)

7,50,000

14,000

16,000

30,000

Total Traceable costs

48,00,000

' . ) 4 3 / # $ % 3 ! " 9 4 ) 6 ) 4 # !

5.15

Required: (i) Prepare a statement showing allocation of manufacturing overheads using the principles of activity-based costing. (ii) Prepare a statement showing product cost and profitability using activity-based costing. (iii) Should ABC Ltd. continue to emphasize the Royal model and phase out the Nova model? Discuss.

[CA November 2005, 10 Marks] Ans. (i) Statement Showing Allocation of manufacturing overhead using the principles of Activity Based Costing: Total

S P U T E 3 E N I H C A D L O S D N A D E C U D O R P S T I N 5

R E W O P E N I H C A -

S R E D R O E S A H C R U 0

L O R T N O # Y T I L A U 1

Nova

S T N E M P I H 3

Royal

G N I R E D L O 3

Cost Collection basis Royal

D A E H R E V O G N I R U T C

AU F UP NT S AO -C

(ii) Statement showing product cost and profitability using Activity Based Costing: Nova

S L A I R E T A M T C E R I $

Royal

E G A S U E N I H C A -

# " !

R E P S A

S D A E H R E V O G N I R U T C A F U N A -

R U O B A , T C E R I $ T S O #

S E L A S F O T S O #

T l O R 0

.

7

S D A E H R E V O N O I T U B I R T S I D D N A G N I L L E 3

S E L A 3

' . ) 4 3 / # $ % 3 ! " 9 4 ) 6 ) 4 # !

5.16

(iii) Statement showing net Income Total

S E S N E P X % E V I T A R T S I N I M D A G N I L L E 3

N I G R A S S O R '

E M O C N ) T E .

ER S E I S H A T HA P2

MY L EL A DU L U D OA HR

D SG E DLT NEC E ADR O LR E O DLC OA E MYB LOO 2 A YET OH D RT E R ETI HUU T OQ E E E S R S I A S S A HI L HPE PDD MNO EALL TE O A D NO Y O DL 2 U OAF HVO SOG Y.N I NNC AOI R P P E MR E OOH #MT

(iv)

Nova

T S O # n S E L A 3

T I N U

N I G R A S S O R '

Royal

S E S N E P X E N O I T U B I R T S I D D N A G N I L L E S L A T O 4

S D A E H R E V O N O I T U B I R T S I D D N A G N I L L E 3

Working:

D L O S S T I N 5

S T I N U

L A Y O 2

`

A V O .

`

`

`

Q7. Biscuit Ltd manufactures 3 types of biscuits, A, B and C, in a fully mechanised factory. The company has been following conventional method of costing and wishes to shift to Activity Based Costing System and therefore wishes to have the following data presented under both the system for the month.

Inspection cost

` p.m. 73,000

Machine-Repairs & Maintenance ` p.m. 1,42,000 Dye cost

` p.m. 10,250

Selling overheads

` p.m. 1,62,000 A

B

C

Prime cost (` per unit)

12

9

8

Selling price (` per unit)

18

14

12

2,520 2,810

3,010

Gross production (unit/ production run) No. of defective units/production run

20

10

10

3

4

4

Inspection: No. of hours/production run

' . ) 4 3 / # $ % 3 ! " 9 4 ) 6 ) 4 # !

5.17 A

Dye cost/production run (`)

B

C

200

300

250

20

12

30

No. of machine hours / production run Sales No. of units/month

25,000 56,000 27,000

The following additional information is given: (i) No accumulation of inventory is considered. All good units produced are sold. (ii) All manufacturing and selling overheads are conventionally allocated on the basis of units sold. (iii) Product A needs no advertisement. Due to its nutritive value, readily consumed by diabetic patients of a hospital. Advertisement it is costs included in the total selling overhead is ` 83,000. (iv) Product B needs to be specially packed before being sold, so that it meets competition. ` 54,000 was the amount spent for the month in specially packing B, and this has been included in the total selling overhead cost given.

You are required to present product wise profitability of statements under the conventional system and the ABC system and accordingly rank the products.

[CA May 2008, 11 Marks] Ans. Statement showing Gross Margin

D A E H R E V O T S O C E M I R 0 `

Total

E U L A V S E L A 3 `

T I N U

E C I R P G N I L L E 3 N I G R A M S S O R '

C

T S O C E M I R 0

B

N U R

S T I N U F O

O .

S T I N 5 S E L A 3

A

Statement Showing Production and Selling Overheads Total

C

B

T S O C N O I T C E P S N )

§ 73, 000 · ¨© 146 × 30 / 80 / 36 respectively¸¹

A

Cost & Management Accounting (CMA) | CRACKER AUTHOR PUBLISHER DATE OF PUBLICATION EDITION ISBN NO NO. OF PAGES BINDING TYPE

: : : : : : :

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Description This book is prepared exclusively for the Intermediate Level of Chartered Accountancy Examination requirement. It covers the questions & detailed answers strictly as per the new syllabus of ICAI. The Present Publication is the 3rd Edition & updated till 30th April 2022 for CA-Inter | New Syllabus | Nov. 2022/May 2023 exams. This book is authored

by CA Ravi Chhawchharia & CA Yash Doctor with the following noteworthy features: · Strictly as per Revised Syllabus of ICAI · Coverage of this book includes: Past Exam Questions 

CA Intermediate July 2021 – Cost & Management Accounting | Suggested Answers

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CA Intermediate May 2022 – Cost & Management Accounting | Suggested Answers

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