AIOU 5410 Cost Accounting Solved Assignment 1 Spring 2025
AIOU 5410 Assignment 1
Q1 a). Define Cost Accounting. State the merits of cost accounting.
Cost accounting is a branch of accounting focused on collecting, analyzing, interpreting, and reporting information related to the costs incurred by an organization. Unlike financial accounting, which primarily serves external stakeholders, cost accounting is designed for internal management to aid in decision-making, planning, and controlling costs. It involves determining the cost of products, services, processes, and activities within a business.
Here are the merits of cost accounting:
Cost Ascertainment: It accurately determines the cost of products, services, or processes, providing a basis for pricing decisions and profitability analysis.
Pricing Decisions: By providing detailed cost information, it helps in setting appropriate selling prices that cover costs and generate desired profits.
Cost Control: It facilitates cost control by establishing budgets, standards, and analyzing variances, enabling management to identify and address inefficiencies.
Performance Evaluation: Cost accounting provides data to evaluate the performance of different departments, processes, and individuals, aiding in identifying areas for improvement.
Decision Making: It supplies relevant cost information for various management decisions, such as make-or-buy decisions, product mix decisions, and capacity utilization.
Identification of Profitable and Unprofitable Activities: Cost accounting helps in identifying which products, services, or activities are profitable and which are not, allowing management to focus on more profitable areas.
Efficiency Measurement: By comparing actual costs with standards, it helps in measuring the efficiency of operations and identifying areas of waste or inefficiency.
Budgeting and Forecasting: Cost data is crucial for preparing realistic budgets and forecasting future costs and revenues.
Inventory Valuation: It provides methods for valuing inventory for financial reporting and decision-making purposes.
Cost Reduction: Through continuous analysis and identification of cost drivers, cost accounting helps in finding ways to reduce costs and improve profitability.
Improved Resource Allocation: By understanding the costs associated with different activities, management can allocate resources more effectively.
Basis for Quotations and Tenders: Accurate cost information enables businesses to prepare competitive and profitable quotations for customers.
Supports Strategic Planning: Cost accounting provides insights into the cost structure of the business, which is essential for long-term strategic planning.
Highlights Areas of Waste and Inefficiency: It helps in identifying and quantifying losses, waste, and idle capacity, prompting corrective actions.
Increased Profitability: Ultimately, by providing better information for decision-making and control, cost accounting contributes to increased profitability for the organization.
Q1 b). Describe the elements of Manufacturing Cost. Describe the classification of Costs regarding recording in Financial Statements.
Elements of Manufacturing Cost
Manufacturing cost represents the total expenses incurred in the process of converting raw materials into finished goods. These costs are typically categorized into three main elements:
1. Direct Materials (DM):
These are the raw materials that become an integral part of the finished product and can be directly traced to it in an economically feasible manner.
Think of the wood in a table, the fabric in clothing, or the steel in a car.
The cost of direct materials includes the purchase price, freight-in (transportation costs of bringing the materials to the factory), insurance during transit, and any other directly attributable costs, net of any discounts or allowances.
2. Direct Labor (DL):
This refers to the wages and salaries paid to workers who are directly involved in the manufacturing process of the finished goods.
Examples include the assembly line workers in a factory, the machinists operating equipment, or the seamstresses sewing garments.
Direct labor costs include gross wages, payroll taxes, fringe benefits (like health insurance and retirement contributions) directly related to these production workers. The key is that their time and effort can be specifically identified with the units produced.
3. Manufacturing Overhead (MOH):
This category encompasses all other manufacturing costs that are not directly traceable to specific units of output. It's often referred to as indirect manufacturing costs or factory overhead.
MOH includes a wide range of costs necessary to support the production process, such as:
- Indirect Materials: Materials used in the production process but not directly part of the finished product or are difficult to trace (e.g., lubricants for machines, cleaning supplies for the factory, small tools).
- Indirect Labor: Wages and salaries of employees who support the manufacturing process but are not directly involved in producing the goods (e.g., factory supervisors, maintenance staff, security personnel in the factory).
- Factory Utilities: Costs of electricity, water, and gas used in the manufacturing facility.
- Factory Rent and Insurance: Costs associated with the factory building and its insurance.
- Depreciation of Factory Equipment: The allocation of the cost of factory machinery and equipment over their useful lives.
- Property Taxes on Factory Buildings and Equipment: Taxes levied on the factory's assets.
- Repairs and Maintenance of Factory Equipment: Costs incurred to keep the production machinery in good working order.
It's important to note that costs like selling expenses, administrative expenses, and research and development costs are *not* considered part of manufacturing overhead. These are period costs and are expensed in the period they are incurred, rather than being included in the cost of goods manufactured.
Classification of Costs Regarding Recording in Financial Statements
Costs are classified in various ways for the purpose of recording and reporting in financial statements. The primary classifications relevant are based on their behavior and their function:
1. Classification by Behavior:
This classification focuses on how costs react to changes in the level of activity (like production volume).
Variable Costs: These costs change in total in direct proportion to changes in the level of activity. The per-unit variable cost remains constant.
Examples in manufacturing include direct materials, direct labor (often), and variable manufacturing overhead (like electricity directly used in production).
In the income statement, the total variable costs will fluctuate with sales volume.
Fixed Costs: These costs remain constant in total regardless of changes in the level of activity within a relevant range. The per-unit fixed cost decreases as activity increases.
Examples in manufacturing include factory rent, depreciation of factory buildings (if straight-line), and salaries of factory supervisors (if fixed).
In the income statement, the total fixed costs will remain the same (within the relevant range) despite changes in sales volume.
Mixed Costs (Semi-Variable Costs): These costs have both a fixed and a variable component.
An example could be the cost of factory utilities, where there's a fixed charge plus a variable charge based on usage.
These costs need to be separated into their fixed and variable components for better cost analysis and decision-making (often using methods like the high-low method or regression analysis).
2. Classification by Function:
This classification groups costs based on the activities or functions they relate to within an organization. This is particularly important for preparing the income statement.
Product Costs (Inventoriable Costs): These are costs associated with the production of goods. Under accrual accounting, these costs are initially recorded as part of inventory and are expensed as "Cost of Goods Sold (COGS)" only when the related goods are sold.
In a manufacturing company, product costs include direct materials, direct labor, and manufacturing overhead. These costs flow through the inventory accounts (Raw Materials, Work-in-Process, Finished Goods) on the balance sheet until the goods are sold.
When the sale occurs, the cost of those goods is transferred from Finished Goods Inventory to Cost of Goods Sold on the income statement.
Period Costs (Non-Inventoriable Costs): These are costs that are not directly linked to the production of goods and are expensed in the period in which they are incurred.
Examples include selling expenses (e.g., advertising, sales commissions, sales salaries, delivery expenses), administrative expenses (e.g., salaries of administrative staff, rent of the administrative building, legal and accounting fees), and research and development expenses.
These costs are reported as operating expenses on the income statement in the period they are incurred.
In summary, for financial statement recording:
Manufacturing costs (direct materials, direct labor, and manufacturing overhead) are initially treated as product costs and are part of inventory on the balance sheet. They become an expense (Cost of Goods Sold) on the income statement when the related products are sold.
Non-manufacturing costs (selling and administrative expenses) are treated as period costs and are directly expensed on the income statement in the period they are incurred.
Understanding these classifications is crucial for preparing accurate financial statements, performing cost analysis, and making informed business decisions.
Q2. The following data pertains to Yellow Corporation for the period ended on 31st December 2024:
| Inventories: | 31-12-24 | 1-1-24 |
|---|---|---|
| Direct Material | 237,500 | 225,000 |
| Work in Process | 200,000 | 175,000 |
| Finished Goods | 237,500 | 275,000 |
| Cost Incurred During the Period: | ||
| Direct Material Used | 492,500 | |
| Cost of Goods Available for Sales | 1,610,000 | |
| Factory Overheads | 517,500 | |
| Total Manufacturing Cost | 1,480,000 |
Required: Prepare Cost of Goods Manufacturing and Sold Statement.
| Direct Materials: | |
| Beginning Direct Material Inventory (January 1, 2024) | $225,000 |
| Direct Material Used | $492,500 |
| Ending Direct Material Inventory (December 31, 2024) | ($237,500) |
| Direct Material Used | $480,000 |
| Direct Labor (Included in Total Manufacturing Cost) | $482,500 |
| Factory Overheads | $517,500 |
| Total Manufacturing Cost | $1,480,000 |
| Beginning Work in Process Inventory (January 1, 2024) | $175,000 |
| Cost of Goods Placed in Process | $1,655,000 |
| Ending Work in Process Inventory (December 31, 2024) | ($200,000) |
| Cost of Goods Manufactured | $1,455,000 |
| Beginning Finished Goods Inventory (January 1, 2024) | $275,000 |
| Cost of Goods Available for Sales | $1,730,000 |
| Ending Finished Goods Inventory (December 31, 2024) | ($237,500) |
| Cost of Goods Sold | $1,492,500 |
Q3 a). Describe the contents of a Job Order Cost Sheet and the benefits which can be reaped out of it by an enterprise.
A Job Order Cost Sheet is a document used in a job order costing system to accumulate all the costs associated with a specific job or project. It serves as a subsidiary ledger for the Work-in-Process inventory account, providing a detailed breakdown of the costs incurred for each unique job.
Typically, a Job Order Cost Sheet contains the following key elements:
- Job Number: A unique identification number assigned to each job for easy tracking.
- Customer Information: Details about the customer for whom the job is being performed.
- Job Description: A brief description of the work to be done or the product to be manufactured.
- Date Started and Date Completed: The timeline of the job.
- Direct Materials:
- Details of raw materials used for the job, including requisition numbers, quantities, and costs.
- A section to record the total cost of direct materials.
- Direct Labor:
- Records of labor hours spent by workers directly involved in the job, often referencing time tickets or employee records.
- Wage rates and the total cost of direct labor incurred.
- Manufacturing Overhead:
- A section for applying or allocating manufacturing overhead costs to the job. This usually involves a predetermined overhead rate and an allocation base (e.g., direct labor hours, machine hours).
- The method and rate used for overhead allocation should be clearly stated.
- The total amount of overhead applied to the job.
- Total Costs: The sum of direct materials, direct labor, and manufacturing overhead costs for the job.
- Cost Summary (Optional): May include the number of units produced (if applicable) and the cost per unit.
- Status of the Job: Indicates whether the job is in progress or completed.
- Profit/Loss Information (Optional): In some advanced formats, the selling price of the job might be included to calculate the profit or loss.
- Marketing and Administrative Expenses (If Directly Traceable): While not typically part of manufacturing costs, some enterprises might include directly attributable marketing or administrative costs for a comprehensive view of job profitability.
Benefits of a Job Order Cost Sheet for an Enterprise:
Implementing and utilizing Job Order Cost Sheets can provide numerous benefits to an enterprise:
- Accurate Cost Determination: It allows for the precise calculation of the total cost of each individual job, which is crucial for industries producing unique or customized products/services. This accuracy helps in setting appropriate selling prices.
- Improved Pricing Decisions: By understanding the true cost of each job, the enterprise can set competitive yet profitable prices. This prevents underpricing, which erodes profitability, and overpricing, which can lead to lost business.
- Enhanced Profitability Analysis: Job Order Cost Sheets enable the enterprise to determine the profitability of individual jobs. This information helps in identifying the most and least profitable types of jobs, allowing for strategic decisions regarding which jobs to pursue in the future.
- Better Cost Control: The detailed breakdown of costs for each job facilitates better monitoring and control of expenses. Variances between estimated and actual costs can be analyzed, and corrective actions can be taken to improve efficiency and reduce waste.
- More Accurate Budgeting and Forecasting: The historical data accumulated in Job Order Cost Sheets provides valuable insights for future job cost estimations, budgeting, and overall financial forecasting.
- Improved Decision-Making: The detailed cost information supports informed decision-making regarding resource allocation, production processes, and job acceptance. Management can identify areas for cost reduction and operational improvements.
- Enhanced Customer Billing: For cost-plus contracts, the Job Order Cost Sheet provides the necessary documentation to justify the billing to the customer, detailing all the costs incurred.
- Performance Evaluation: By tracking labor costs and efficiencies on each job, management can evaluate the performance of individual employees or teams.
- Identification of Inefficiencies: Analyzing cost sheets over time can reveal trends and areas where inefficiencies exist in the production process, leading to process improvements.
- Support for Strategic Planning: The insights gained from job costing data can inform the enterprise's long-term strategic planning, helping to focus on profitable job types and efficient resource utilization.
- Inventory Valuation: Job Order Cost Sheets help in determining the cost of goods manufactured and the value of work-in-process inventory at any given time.
In essence, the Job Order Cost Sheet is a vital tool for enterprises that undertake specific projects or produce unique items. It provides a clear and detailed picture of the costs involved, empowering management to make informed decisions that enhance profitability, efficiency, and overall business performance.
Q3 b).
The following transactions were conducted during the month of September, you are required to record the above transactions in the general journal.
i. Material costing Rs. 550,000 was purchased.
ii. Direct Material costing Rs. 358,000 was issued to production for various jobs. The indirect material and supplies costing Rs. 22,000 were also issued.
iii. The payroll for the month of September amounted to Rs. 380,000 from which Provident Fund of Rs. 18,000 and Income Tax of Rs. 15,000 was deducted. The due amount of payroll was paid to the workers and employees.
iv. The payroll was allocated as under: -
Direct Labour Rs. 275,000
Indirect Labour Rs. 24,000
Marketing staff Rs. 55,000
Admin. Staff Rs. 26,000
v. The Factory Overhead was applied at 70% of the direct labour cost.
General Journal Entries
Transaction i: Material Purchase
| Date | Account | Debit (Rs) | Credit (Rs) | Description |
|---|---|---|---|---|
| Sept | Materials Inventory | 550,000 | Purchased materials. | |
| Sept | Accounts Payable | 550,000 | Purchased materials on account. |
Transaction ii: Material Issue
| Date | Account | Debit (Rs) | Credit (Rs) | Description |
|---|---|---|---|---|
| Sept | Work in Process Inventory | 358,000 | Issued direct materials to production. | |
| Sept | Factory Overhead | 22,000 | Issued indirect materials to production. | |
| Sept | Materials Inventory | 380,000 | Issued materials to production. |
Transaction iii: Payroll
| Date | Account | Debit (Rs) | Credit (Rs) | Description |
|---|---|---|---|---|
| Sept | Salaries and Wages Payable | 380,000 | Recorded monthly payroll. | |
| Sept | Provident Fund Payable | 18,000 | Recorded Provident Fund deduction. | |
| Sept | Income Tax Payable | 15,000 | Recorded Income Tax deduction. | |
| Sept | Cash | 347,000 | Paid net wages to employees. |
Transaction iv: Payroll Allocation
| Date | Account | Debit (Rs) | Credit (Rs) | Description |
|---|---|---|---|---|
| Sept | Work in Process Inventory | 275,000 | Allocated direct labor to production. | |
| Sept | Factory Overhead | 24,000 | Allocated indirect labor to production. | |
| Sept | Marketing Expenses | 55,000 | Allocated marketing staff salaries. | |
| Sept | Administrative Expenses | 26,000 | Allocated administrative staff salaries. | |
| Sept | Salaries and Wages Payable | 380,000 | Distribution of payroll. |
Transaction v: Factory Overhead Application
| Date | Account | Debit (Rs) | Credit (Rs) | Description |
|---|---|---|---|---|
| Sept | Factory Overhead | 192,500 | Applied factory overhead to production (70% of direct labor). | |
| Sept | Work in Process Inventory | 192,500 | Applied factory overhead to production. |
Q4. Department 2 of Sunrise’s costs for May 2024 were extracted from the cost accounting record as under: -
Cost from Department 1. Rs. 320,000
The cost incurred by Department 2.
Materials Rs. 360,000
Labour Rs. 206,250
Factory overheads Rs. 123,750
The record shows that 12,000 units were received during the month from Department 1. Department 2 transferred 7,000 units to the Finished Goods Warehouse. The work in process at the end of May was 5,000 units which were 100% complete as to the material cost but only 25% were complete as to the conversion cost.
Required: Prepare a cost of production report for department 2.
Cost of Production Report - Department 2
For the Month of May 2024
| Cost Element | Total Cost (Rs.) |
|---|---|
Cost from Department 1 |
320,000 |
Costs Incurred in Department 2 |
|
Materials |
360,000 |
Labour |
206,250 |
Factory Overheads |
123,750 |
Total Costs to Account For |
1,010,000 |
| Quantity Schedule | Units |
|---|---|
Units Received from Department 1 |
12,000 |
Units Transferred to Finished Goods |
7,000 |
Work in Process, End of May |
5,000 |
Total Units Accounted For |
12,000 |
| Equivalent Units | Materials | Conversion Costs |
|---|---|---|
Units Transferred to Finished Goods |
7,000 |
7,000 |
Work in Process, End of May |
5,000 |
1,250 (5,000 x 25%) |
Total Equivalent Units |
12,000 |
8,250 |
| Cost per Equivalent Unit | |
|---|---|
Cost from Department 1 |
Rs. 26.67 |
Materials |
Rs. 30.00 |
Labour |
Rs. 25.00 |
Factory Overheads |
Rs. 15.00 |
Total Cost per Equivalent Unit |
Rs. 96.67 |
| Cost Assignment | |
|---|---|
Cost of Units Transferred (7,000 units x Rs. 96.67) |
676,690 |
Work in Process, End of May |
|
Cost from Department 1 (5,000 units x Rs. 26.67) |
133,350 |
Materials (5,000 units x Rs. 30.00) |
150,000 |
Labour (1,250 units x Rs. 25.00) |
31,250 |
Factory Overheads (1,250 units x Rs. 15.00) |
18,750 |
Total Costs Accounted For |
1,010,040 |
Q5. a) Draw formats of some proformas usually followed in the organization right from initiating a requirement to consumption relating to the materials.
Q5. b)
The quarterly requirement of some modules of Shan Engineering Company for manufacturing water pumps is 1,200 units. The cost per module is Rs. 120. The Ordering Cost is Rs. 800 while the Carrying Cost of the average inventory investment is 20%.
Required: Compute the following:
A) Economic Order Quantity.
B) The Total number of orders to be placed in a year based on EOQ modelling.
C) Frequency of orders in days.
D) Annual Ordering Cost.
E) Annual Inventory cost.
Given Data:
- Quarterly Demand: 1,200 units
- Annual Demand (D): 1,200 × 4 = 4,800 units
- Cost per module: Rs. 120
- Ordering Cost (S): Rs. 800 per order
- Carrying Cost (H): 20% of unit cost → H = 120 × 0.2 = 24 Rs per unit per year
1. Economic Order Quantity (EOQ)
The EOQ formula is:
EOQ = √((2 × D × S) / H)
EOQ = √((2 × 4,800 × 800) / 24)
EOQ = √(7,680,000 / 24)
EOQ = √320,000 ≈ 565.69 units
Economic Order Quantity: 566 units (rounded up)
2. Total Number of Orders in a Year
Total Orders = D / EOQ
Total Orders = 4,800 / 566 ≈ 8.48
Total Number of Orders: 8 or 9 orders per year
3. Frequency of Orders in Days
Order Frequency = Number of days in a year / Total Orders
Order Frequency = 365 / 8.48 ≈ 43 days
Orders will be placed approximately every 43 days.
4. Annual Ordering Cost
Annual Ordering Cost = Total Orders × Ordering Cost
Annual Ordering Cost = 8.48 × 800 = 6,784 Rs
Annual Ordering Cost: Rs. 6,784
5. Annual Inventory Cost
Annual Inventory Cost = (EOQ / 2) × H
Annual Inventory Cost = (566 / 2) × 24
Annual Inventory Cost = 283 × 24 = 6,792 Rs
Annual Inventory Cost: Rs. 6,792
Total Inventory Cost
Total Inventory Cost = Annual Ordering Cost and Annual Inventory Cost
Total Inventory Cost = 6,784 + 6,792
Total Inventory Cost = 13,576 Rs
Total Inventory Cost: Rs. 13,576
AIOU 5410 Cost Accounting Solved Assignment 2 Spring 2025
AIOU 5410 Assignment 2
Q1. The Universal Garment Factory is producing Job No. 15 which comprises 2,000 dresses of style A-1. The following costs were incurred for this production: Journal Entries A) Loss from spoiled dresses charged to the relevant job (Job No. 15) B) Loss from spoiled dresses charged to all production
Direct Materials cost Rs. 200 per dress
Direct Labour costs Rs. 120 per dress
Factory Overheads cost Rs. 160 per dress
When the lot was completed, the Quality Control department rejected 20 dresses after inspection which were considered spoiled dresses and were later disposed of for Rs. 150 per dress as ‘seconds.
Required:
A) Pass journal entries if the loss from spoiled dresses is charged to the relevant job.
B) Pass journal entries if the loss from spoiled dresses is charged to all production.
Date
Account Title
Debit
Credit
Work-in-Process Control (Job No. 15)
9,600
Spoiled Goods Inventory
9,600
Cash/Bank
3,000
Spoiled Goods Inventory
3,000
Cost of Goods Sold (Job No. 15 - Spoilage Loss)
6,600
Work-in-Process Control (Job No. 15)
6,600
Date
Account Title
Debit
Credit
Spoiled Goods Inventory
9,600
Work-in-Process Control (Job No. 15)
9,600
Cash/Bank
3,000
Spoiled Goods Inventory
3,000
Factory Overhead Control
6,600
Spoiled Goods Loss Account
6,600
Spoiled Goods Loss Account
6,600
Factory Overhead Control
6,600
Q2. Describe the three methods of costing of material issuance to production. What are the advantages and disadvantages of FIFO and LIFO costing methods?
Methods of Costing Material Issuance to Production
The three main methods of costing material issuance to production are:
- First-In, First-Out (FIFO): This method assumes that the materials purchased or received first are the first ones to be issued to production. Therefore, the cost of the oldest inventory is assigned to the materials issued. The remaining inventory is valued at the most recent purchase prices.
- Last-In, First-Out (LIFO): This method assumes that the materials purchased or received last are the first ones to be issued to production. Consequently, the cost of the newest inventory is assigned to the materials issued. The remaining inventory is valued at the oldest purchase prices. It's important to note that LIFO is not permitted under International Financial Reporting Standards (IFRS) and is primarily used in the United States.
- Weighted Average Cost (WAC): This method calculates a new average cost after each purchase by dividing the total cost of materials in stock by the total quantity of materials in stock. This weighted average cost is then used to value all material issues until the next purchase.
Advantages and Disadvantages of FIFO and LIFO Costing Methods
FIFO (First-In, First-Out)
Advantages:
- Reflects the physical flow of inventory
- More accurate ending inventory valuation
- Generally accepted accounting principle (GAAP) and IFRS compliant
- Less susceptible to manipulation
- Reduces the risk of obsolete inventory
Disadvantages:
- Mismatched with current costs during inflation
- Can lead to higher taxes during inflation
- Potential for lower reported income during deflation
LIFO (Last-In, First-Out)
Advantages:
- Matches current costs with current revenue during inflation
- Can provide tax benefits during inflation
- May simplify decision-making in some industries
Disadvantages:
- Does not reflect the physical flow of inventory for most businesses
- Can lead to an understated inventory valuation
- Not permitted under IFRS and has specific rules under GAAP
- Potential for higher reported income during deflation
- Can lead to "LIFO liquidation" issues
- More complex record-keeping
Q3 a). Describe the functions of a Timekeeping department and various methods used for controlling the attendance of workers in a factory.
Describe the functions of a Timekeeping department and various methods used for controlling the attendance of workers in a factory.
The Timekeeping Department in a factory plays a crucial role in managing worker attendance and ensuring accurate records for payroll and operational efficiency. Its key functions include:
- Recording Attendance: Tracking the daily arrival and departure times of employees.
- Monitoring Work Hours: Ensuring compliance with scheduled shifts, overtime regulations, and break periods.
- Processing Payroll Data: Providing accurate time records for calculating wages, bonuses, and overtime pay.
- Ensuring Discipline: Preventing unauthorized absences and tardiness to maintain productivity.
- Compliance and Reporting: Keeping records to meet labor laws and company policies.
Methods for Controlling Attendance:
Factories use various methods to monitor and control worker attendance, including:
- Manual Attendance Registers: Workers sign in and out on physical registers, often maintained by a supervisor.
- Punch Card Systems: Employees use punch cards to clock in and out, providing a timestamped record.
- Biometric Systems: Fingerprint or facial recognition scanners ensure accurate attendance tracking and prevent fraud.
- RFID or Smart ID Cards: Employees scan RFID-enabled cards at entry/exit points for automated attendance recording.
- Digital or Mobile Apps: Some factories use apps or web-based systems where employees check in digitally.
- Turnstile or Access Control Systems: Workers can only enter or exit through gates controlled by an attendance system.
- Supervisor or Managerial Checks: Shift managers directly verify attendance for added accountability.
A well-maintained timekeeping system helps factories optimize labor management, improve productivity, and ensure fair employee compensation.
Q3 b). (b) Roshan Steel Products Industries is applying a differential piece rates work system for labour payment. The differential rates applied are 80%-piece rate below standard and 120%-piece rate at or above standard. The standard allowed is 10 units per hour. The normal wage rate is Rs. 70 per hour. Abrar completed 100 units while Badar completed 80 units in a day. The workers are required to work for 9 hours daily.
Required: Compute earnings of the day of both workers under a differential piece rate work system.
Given Data:
- Standard rate: 10 units per hour
- Work hours per day: 9 hours
- Total standard production per day: 10 × 9 = 90 units
- Normal wage rate: Rs. 70 per hour
- Piece rate basis:
- 80% of the normal piece rate if production is below standard
- 120% of the normal piece rate if production meets or exceeds standard
Step 1: Calculate Normal Piece Rate
Normal piece rate is based on the normal wage rate:
Normal piece rate = Normal wage rate per hour / Standard production per hour
= 70 / 10 = 7 Rs. per unit
Step 2: Compute Earnings for Abrar
1. Abrar produced 100 units, which is above the standard of 90 units.
2. His earnings are based on 120% of the normal piece rate.
3. Earnings of Abrar = 100 × (7 × 120%)
= 100 × (7 × 1.2) = 100 × 8.4 = 840 Rs.
Step 3: Compute Earnings for Badar
1. Badar produced 80 units, which is below the standard of 90 units.
2. His earnings are based on 80% of the normal piece rate.
3. Earnings of Badar = 80 × (7 × 80%)
= 80 × (7 × 0.8) = 80 × 5.6 = 448 Rs.
Final Answer:
- Abrar's earnings: Rs. 840
- Badar's earnings: Rs. 448
Q4. The normal operating capacity of Faiza Chemical Industries is 250,000 machine hours per month. At this level of activity, the fixed factory overhead cost is estimated at Rs. 500,000 and variable overhead is estimated at Rs. 250,000. During April 2014, the actual production consumed 240,000 machine hours and the actual factory overhead cost amounted to Rs. 730,000.
Required:
a) Determine the fixed portion of the factory overhead application rate.
b) Determine the variable portion of the factory overhead application rate.
c) Compute the amount of over or under-applied factory overhead cost.
d) Calculate the amount of favourable or unfavourable Spending Variance.
e) Work out the amount of favourable or unfavourable idle capacity variance.
1) Fixed portion of the factory overhead application rate
The fixed overhead cost is Rs. 500,000 at 250,000 machine hours. So, the fixed overhead rate per machine hour:
500,000 ÷ 250,000 = Rs. 2 per machine hour
2) Variable portion of the factory overhead application rate
Similarly, the variable overhead cost is Rs. 250,000 at 250,000 machine hours. So, the variable overhead rate per machine hour:
250,000 ÷ 250,000 = Rs. 1 per machine hour
3) Over or under-applied factory overhead cost
The standard factory overhead applied based on actual machine hours (240,000 hours) is:
240,000 × (2 + 1) = 240,000 × 3 = Rs. 720,000
Actual factory overhead cost incurred = Rs. 730,000
Over/under-applied overhead = Actual cost - Applied cost
730,000 - 720,000 = Rs. 10,000 (Under-applied)
4) Spending Variance
Spending variance is the difference between the actual variable overhead and the expected variable overhead cost based on actual hours worked.
- Expected variable overhead at 240,000 machine hours:
- 240,000 × 1 = Rs. 240,000
- Actual variable overhead (Total actual overhead - Fixed overhead):
- 730,000 - 500,000 = Rs. 230,000
Spending variance:
230,000 - 240,000 = Rs. 10,000 (Favourable)
5) Idle Capacity Variance
Idle capacity variance is based on the difference between standard fixed overhead applied and expected fixed overhead.
- Expected fixed overhead at full capacity (250,000 machine hours):
- 500,000 (given)
- Applied fixed overhead at actual hours worked:
- 240,000 × 2 = Rs. 480,000
Idle capacity variance:
500,000 - 480,000 = Rs. 20,000 (Unfavourable)
Q5. The Oxford Garments Industries comprises four departments. Cutting, Stitching and Finishing are the Production departments whereas Procurement is the Servicing Department. Actual overhead costs for June 2024 are as under:
Rent Rs. 120,000
Supervision Rs. 30,000
Repair and maintenance Rs. 12,000
Insurance Rs. 14,000
Depreciation of Plant Rs. 90,000
Lighting Rs. 16,000
Power consumption Rs. 18,000
The following further data is also available in respect of the four departments
Particulars
Cutting
Stitching
Finishing
Procurement
Square foot area occupied
150
110
90
50
Number of workers
24
16
12
8
Total Wages
Rs. 240,000
Rs. 192,000
Rs. 96,000
Rs. 80,000
Value of Plant
Rs. 200,000
Rs. 600,000
Rs. 100,000
–
Value of Stock
Rs. 150,000
Rs. 90,000
Rs. 60,000
–
Answer: Overhead Cost Allocation for June 2024
| Overhead Cost | Allocation Base | Total Cost (Rs.) | Cutting (Rs.) | Stitching (Rs.) | Finishing (Rs.) | Procurement (Rs.) |
|---|---|---|---|---|---|---|
| Rent | Square foot area | 120,000 | 45,000 | 33,000 | 27,000 | 15,000 |
| Repair and maintenance | Value of Plant | 12,000 | 2,666 | 8,000 | 1,333 | - |
| Depreciation of Plant | Value of Plant | 90,000 | 20,000 | 60,000 | 10,000 | - |
| Power consumption | Value of Plant | 18,000 | 4,000 | 12,000 | 2,000 | - |
| Supervision | Number of workers | 30,000 | 12,000 | 8,000 | 6,000 | 4,000 |
| Insurance | Value of Plant | 14,000 | 3,112 | 9,336 | 1,556 | - |
| Lighting | Square foot area | 16,000 | 6,000 | 4,400 | 3,600 | 2,000 |
| Total Overhead | 290,000 | 92,778 | 134,736 | 51,495 | 21,000 |
Allocation of Procurement Department Costs
| Department | Number of Workers | Allocation from Procurement (Rs.) |
|---|---|---|
| Cutting | 24 | 9,692.40 |
| Stitching | 16 | 6,461.60 |
| Finishing | 12 | 4,846.20 |
| Total | 52 | 21,000.20 |
Total Overhead Costs for Production Departments
| Department | Directly Allocated Overhead (Rs.) | Allocated Procurement Overhead (Rs.) | Total Overhead (Rs.) |
|---|---|---|---|
| Cutting | 92,778 | 9,692.40 | 102,470.40 |
| Stitching | 134,736 | 6,461.60 | 141,197.60 |
| Finishing | 51,495 | 4,846.20 | 56,341.20 |
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