Answer: Rs 1,80,000

18,500 hours — Rs 2,02,500

12,000 hours — Rs 1,70,000

Difference: 6,500 hours — Rs 32,500

Variable cost = Rs 32,500 / 6,500 hours = Rs 5 per hour

Fixed cost = SV - VC

1,70,000 - (12,000 x 5) = Rs 1,10,000

Cost of maintenance for 14,000 hours =14,000 x 5 = 70,000 + 1,10,000 = Rs 1,80,000

Answer: Rs 400 lakh

BEP = F/PV ratio, that is, Rs 120 lakh/0.4 = Rs 300 lakh. Annual sales should be Rs 400 lakh. The margin of safety is Rs 100 lakh, which is 25 per cent of annual sales.

Answer: Rs 14 lakh

Current ratio is 2.2, that is, CA/CL = 2.2/1.0

Stock = current ratio minus liquid ratio, that is, 2.2 - 0.8 = 1.4

If CL (1.0) is Rs 10 lakh, stock held by the firm (1.4) would be Rs 14 lakh

Machine hour rate

COMPUTE a comprehensive machine hour rate for a machine in production department `A' of a factory from the following details:

Machine: Cost, including installation charges: Rs 20,00,000

Estimated useful life: 10 years

Estimated salvage value: 10 per cent

Working hours: Number of working days: 300

Number of shifts per day: Two

Effective working hours per shift: Seven

Stoppage for repairs and maintenance, and so on: 200 hours

Operating and other costs:

i) Wages of two operators (one for each shift) at Rs 5,000 per month.

ii) Salary of supervisor (one for each shift) at Rs 7,500. Only one-fifth of the supervisor's time is devoted to this machine.

iii) Electric power: 20 units per hour, each unit costing

Rs 3.20

iv) Insurance charges: Rs 5,000 per annum

v) Repairs and maintenance (estimated): Rs 12,500 p.m.

vi) Rent, rates and taxes (allocated) Rs 10,000 p.a.

vii) General lighting and so on (allocated) Rs 750 p.m.

viii) Other factory overheads (allocated) Rs 1,40,000 p.a.

Answer: The computation of comprehensive machine hour rate is given in Table 1.

Effective working hours = 300 x 2 x 7 = 4200 - 200 = 4,000 hours.

Equivalent production

FROM the following information relating to Process I of a factory for the month of April 2003, prepare the statement of equivalent production, statement of cost, statement of evaluation and process account, using the average cost method:

i) Opening work in progress (500 units): Materials — Rs 27,000

Labour — Rs 8,000

Overheads — Rs 12,500

Sub-total — Rs 47,500

ii) Cost incurred during April 2003

Input of materials (14,000 units): Rs 5,74,750

Labour — Rs 1,19,300

Overheads — Rs 1,78,450

iii) Process loss:

Normal loss — 10 per cent

Value of scrapped unit — Rs 10 each

Actual loss during April 2003 — 1,500 units

Degree of completion: Materials 100 per cent, labour and overheads 60 per cent.

iv) Closing work-in-progress — 1,000 units

Degree of completion: Materials 100 per cent, labour and overheads 70 per cent

v) Processed units transferred to Process II: 12,000 units during April 2003.

WN1: Opening WIP (500 units) + input of materials (14,000 units) = Total input (14500 units).

Solution: The statement of equivalent production (EQP) and statement of cost (average cost method) are presented in Table 2.

Statement of evaluation:

1) Value of output transferred to Process II: 12,000 units at 70 = Rs 8,40,000

2) Value of abnormal loss:

Materials: 50 units at 45 = Rs 2,250

Labour: 30 units at 10 = Rs 300

Overheads: 30 units at 15 = Rs 450

Sub-total = Rs 3,000

3) Value of closing WIP:

Materials: 1,000 units at 45 = Rs 45,000

Labour: 700 units at 10 = Rs 7,000

Overheads: 700 units at 15 = Rs 10,500

Sub-total = Rs 62,500

Process I A/c is presented in Table 3.

(To be concluded)

(Suggested answers to the June 2003 ICWA (Intermediate) paper on cost and management accounting.)

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