The Hindu Business Line : Costing in the old mould

A MANUFACTURING company disclosed a net loss of Rs 5,72,000 as per the cost accounts for the year ended March 31, 2002. The financial accounts, however, disclosed a net loss of Rs 8,84,000 for the same period. The information given in Table 1 showed up as a result of scrutiny of the figures of both the sets of books. Prepare a memorandum reconciliation account.

The memorandum reconciliation account is presented in Table 2.

Flexible budgets

PQR Ltd uses a comprehensive budgeting process and compares actual results to the budgeted amount on a monthly basis.

The production manager is upset about the results of October 2002 shown in Table 3. He has implemented several cost-cutting measures in the manufacturing area and is discouraged by the adverse variance in variable costs.

When master budget was being prepared, the cost accountant supplied the following unit costs data: Direct material — Rs 60;

direct labour — Rs 44; variable overheads — Rs 36; and variable selling overheads — Rs 12

The total variable cost of Rs 11,70,000 in October consists of the items shown in Table 4. The cost accountant believes that a monthly report would be more meaningful to every one if the company adopts flexible budgeting and prepares a more detailed analysis.

Required: i) A flexible budget for October 2002, which includes separate variable cost budgets; and ii) the determination of flexible budget variances.

The flexible budget for 7,200 units sold in October is shown in Table 5.

The flexible budget variance is presented in Table 6.

Overheads, job costing

RST Ltd produces machine parts on a job-order basis. Most of the business is obtained through bidding. And most of the firms competing with RST bid full cost plus a 20 per cent mark-up. Recently, with the expectation of gaining more sales, RST Ltd reduced its mark-up from 25 per cent to 20 per cent. The company operates two service departments and two producing departments. The budgeted costs and the normal levels of activity for each department are given in Table 7.

The direct costs of Department A are allocated on the basis of employees; those of Department B are allocated on the basis of maintenance hours. Departmental overhead rates are used to assign costs to products. Department C uses machine hours, and Department D uses labour hours. The firm is preparing to bid on a job (Job Z) that requires three machine hours per unit produced in Department C and no time in Department D. The expected prime cost per unit is Rs 85.

Required: Allocate the service costs to the production departments using the direct method: i) What will be the bid for Job Z, if the direct method of allocation is used? ii) Allocate the service costs to the producing departments using the sequential (step) method; iii) What will the bid be for Job Z, if the sequential method is used?; iv) allocate the service costs to the production departments using the reciprocal method; and v) what will the bid be for Job Z, if the reciprocal method is used?

i) The allocation of service costs to production departments (direct method) is shown in Table 8.

ii) Bid for Job Z:

Prime cost — Rs 85;

Add: Overheads in Department C (three hours at Rs 31) — Rs 93

Total cost — Rs 178

Add: Mark-up at 20 per cent — Rs 35.60

Bid amount for Job Z — Rs 213.60

iii) The allocation of service costs to producing departments through the sequential (step) method is presented in Table 9.

iv) Bid for Job Z:

Prime cost — Rs 85

Add: Overheads in Department C (three hours at Rs 29.80) — Rs 89.40

Total cost — Rs 174.40

Add: Mark-up at 20 per cent — Rs 34.88

Bid amount for Job Z — Rs 209.28

v) Allocation of service costs to producing departments (reciprocal method) is shown in Table 10.

vi) Bid for Job Z:

Prime cost — Rs 85

Add: Overheads in Department C (three hours at Rs 30.16) — Rs 90.48

Total cost — Rs 175.48

Add: Mark-up at 20 per cent — Rs 35.10

Bid amount for Job Z — Rs 210.58

(To be concluded)

(Suggested answers to the November 2002 CA (Intermediate) paper on cost accounting.)

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