The Hindu Business Line : Tough and time-consuming

THE following cost data are available from the records of ABC Ltd with regard to its product Milenium: Selling price per unit — Rs 60; variable cost per unit — Rs 36; fixed cost per unit — Rs 12; and normal output — 1,00,000 units

Other additional data for four consecutive periods are presented in Table 1. You are required to prepare a statement showing profit for different periods, under both marginal costing and absorption costing methods, showing under/over absorption of overheads, if any.

The marginal and absorption costing for periods I, II, III and IV are presented in Tables 2, 3, 4 and 5 respectively. The statement of reconciliation of profit is shown in Table 6.

When production exceeds sales (period II), a higher profit is shown by using absorption costing, whereas when sales exceed production (periods III and IV), a higher profit is shown by using marginal costing.

This is the difference due to valuation of closing stock at variable cost plus fixed cost under absorption costing method. Under the marginal costing method, closing stock is valued at variable cost only.

There will not be any difference in profit (period I) in case of no stock balance in the beginning of the period or at the end of period, that is, when the production and sales are the same with no stock balances, the profit will be same under marginal costing as well as absorption costing (period I).

Note: Similarly, the profit is same in the whole year because both production and sales are same (4,20,000 units) with no stock balances at the beginning or at the end of the year.

Re-order level

THE safety stock is 200 units; the supplier quotes a delivery delay of 2-3 weeks; the factory uses 400-700 units a week according to activity levels. What is the re-order level?

Re-order Level = Maximum consumption x maximum lead time

700 units x 3 weeks =2100 units.

Overhead absorption

BASED on the following data, compute i) overhead absorption rate; and ii) the amount of under- or over-absorbed overhead: Budgeted labour hours — 8,500; budgeted overheads — Rs 1,48,750; actual labour hours — 7,928; actual overheads — Rs 1,46,200

i) Budgeted overhead absorption rate = budgeted overheads / budgeted labour hours.

Rs 1,48,750 / 8,500 labour hours = A 17.50 per labour hour

ii) Actual overhead = 1,46,200

Overhead absorbed (7,928 hours at 17.50) = Rs 1,38,740

Under-absorption overheads = Rs 7,460

Marginal costing

IF MARGIN of safety is 40 per cent of sales and profit is Rs 20,000 find out the fixed cost.

Margin of safety (40 per cent of sales) = Profit of Rs 20,000 + fixed cost

BEP (60 per cent of sales) = Profit (nil) + fixed cost

Difference (20 per cent of sales = Profit of Rs 20,000

Sales = Rs 20,000 / 20 per cent = Rs 1,00,000

Margin of safety (40 per cent of sales) = Rs 40,000

Margin of safety = Profit / PV ratio

40,000 = 20,000 / PV ratio

PV ratio = 50 per cent

BEP (60 per cent of sales) = Rs 60,000

BEP = Fixed cost / PV ratio

Rs 60,000 = Fixed cost / 50 per cent

Fixed cost = Rs 30,000

The reconciliation is presented in Table 7.

Operating costing

NEW India Transport Corporation has been facing financial and operational problems owing to the spiralling rise in fuel prices, high cost of spares and also high wages. The operational expenses for the one-year period ended September 30, 2002, are shown in Table 8.

The total fleet of vehicles is 600 single deck buses.

The average passengers per each trip is 50.

The aggregate of administrative overhead is to be absorbed in the operating cost on the basis of available number of buses in the operating (assuming average breakdown @ 12½ per cent).

Depreciation on buses is computed @ 20 per cent based on straight-line method.

Based on this information, you are required to advise the management on the fare structure, assuming cost plus15 per cent margin for the following stages of travel (rounded off to nearest 50 paise):

First stage of travel — 2 km; second stage of travel — 5 km; third stage of travel — 10 km; fourth stage of travel — 15 km.

Assume that the fare is charged in proportion to kilometre travelled.

The statement of operating cost per bus per annum (600 buses - 12.5 per cent = 525 buses available) is given in Table 9.

(Suggested answers to the December 2002 ICWA (Stage I) paper on cost accounting.)

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