Financial Daily from THE HINDU group of publications
Monday, Aug 30, 2004
Financial Daily from THE HINDU group of publications Monday, Aug 30, 2004 |
|
|
|
|
|
Mentor
-
Accountancy Get set for an activity in cost allocation P. V. Rathnam
The company makes three products, M, S and T, for the year ended March 31, 2004, and the consumption of cost drivers is reported in Table 9.
Required: a) Compute the costs allocated to each product from each activity; b) Calculate the cost of unused capacity for each activity; and c)
Discuss the factors the management considers in choosing a capacity level to compute the budgeted fixed overhead cost rate.
The computation of the costs allocated is shown in Table 10. Cost of unused capacity: Power: Capacity — 50000 kWh Less: Used — 45,000 kWh (90 per cent) Unused capacity — 5,000 kWh at Rs 4 = Rs 20,000 (that is, Rs 2,00,000 - Rs 1,80,000 = Rs 20,000) Quality inspections: Capacity — 10,000 kWh Less: Used — 9,000 (90 per cent) Unused capacity — 1,000 kWh at Rs 30 = Rs 30,000 (that is, Rs 3,00,000 - Rs 2,70,000 = Rs 30,000) Total installed capacity should not be taken into account. Normal capacity, that is, achievable capacity, is to be taken into account for computing the budgeted fixed overhead cost rate. Process costing
Process I is closely monitored by a team of chemists who planned the output per 1,000 kg of input materials to be as follows: Product J — 500 kg; Product K — 350 kg; Product L — 100 kg; and toxic waste — 50 kg. The toxic waste is disposed at a cost of Rs 16.50 per kg, and arises at the end of processing. Process II, which is used for further processing of product K into product K2, has the following cost structure: Fixed costs — Rs 2,64,000 per week; variable cost — Rs 16.50 per kg processed. The following actual data relate to the first week of the month: Process I: Opening work-in progress — nil Material input — 40,000 kg costing Rs 6,60,000 Direct labour — Rs 4,40,000 Variable overheads — Rs 1,76,000 Fixed overheads — Rs 2,64,000 Output: Product J — 19,200 kg; Product K — 14,400 kg; Product L — 4,000 kg; toxic waste — 2,400 kg; closing work-in-progress — nil. Process II: Opening work-in-progress — nil; input of product K — 14,400 kg; output of product K — 213,200 kg; closing work-in-progress (50 per cent converted and conversion costs were incurred in accordance with the planned cost structure) — 1,200 kg Required: Prepare Process I account for the first week of the month using the final sales value method of attribute, the pre-separation costs to join products. Prepare the toxic waste account and Process II account for the first week of the month. Comment on the method used by the JKL Ltd to attribute the pre-separation costs to joint products. Advise the management of JKL Ltd whether or not, on purely financial grounds, it should continue to process product K into product K2: If product K could be sold at the point of separation for Rs 47.30 per kg; and If the 60 per cent of the weekly fixed costs of Process II were avoided by not processing product K further. Answer: i) Process I A/c is presented in Table 11.
WN1: Cost per kg = total cost - value of normal waste / input quantity - normal loss quantity 1540000 - 33000 / 40000 - 2000 = Rs 39.6579
Value of abnormal loss = 400 x 39.6579 = Rs 15863 WN2: Pre-separation cost: Total amount = Rs 15,40,000 Less: Value of normal waste = (-) 33,000 Value of abnormal waste = (-) 15,863 Pre-separation cost = Rs 14,91,137
Final sales value: Product J — 19,200 kg at Rs 55 = Rs 10,56,000 Product K — 2,13,200 kg at Rs 77 = Rs 10,16,400
By-product L — 4,000 kg at Rs 19.25 = Rs 77,000 Total = Rs 21,49,400 Apportionment of pre-separation cost in proportion to final sales value: Product J: 14,91,137 x 10,56,000 / 21,49,400 = Rs 7,32,595 Product K: 14,91,137 x 10,16,400 / 21,49,400 = Rs 7,05,123 By-product L: 14,91,137 x 77,000 / 21,49,400 = Rs 53,419 Total = Rs 14,91,137 ii) The toxic waste (normal) account, the abnormal toxic waste account and the Process II account are presented in Tables 12, 13 and 14. WN3: Value of closing WIP: Fixed cost: 2,64,000 / 14,400 = Rs 18.333 per kg Add variable cost = Rs 16.50 per kg Conversion cost = Rs 34.833 per kg 50 per cent of 1200 = 600 kg at Rs 34.833 = Rs 20,900 iii) Comments: The method used by JKL Ltd is not appropriate. Instead of taking the final sales of value of Product K2, the company should have adopted the sales value of product K at the point of separation which is at Rs 47.30 per kg, that is, 14,400 x 47.30 = Rs 6,81,120 should have been taken into account. iv) Advice: Sales value of K2 =13,200 x 77= Rs 10,16,400 Cost of output of K2 = Rs 11,85,823 Loss: Rs 1,69,423 Sales value of K = 14,400 x 47.30 = Rs 6,81,120 Add: Savings in Process II — 60 per cent of Rs 2,64,000 = Rs 1,58,400 Total income = Rs 8,39,520 Cost of output of K = Rs 7,05,123 Profit = Rs 1,34,397 On purely financial grounds, the company should not process Product K into Product K2, because it will result in a loss of Rs 1,69,423.
Working capital computation
It keeps two month's stock of finished goods and one month's stock of raw materials as inventory. It keeps cash balance of Rs 2,50,000. Assume a 5 per cent safety margin, work out the working capital requirements of the company on cash-cost basis. Ignore work-in-progress.
Answer: WN1: The annual figures of MNP Ltd is shown in Table 19, and the working capital requirement (cash-cost basis) in Table 20.
Note: A similar question was asked in the May 1990 CA (Final) exam. Suggested answers to the May 2004 CA (PE II) paper on cost accounting and financial management. To access Mentor archives visit: thehindubusinessline.com/mn/arcmn.htm
Article E-Mail :: Comment :: Syndication :: Printer Friendly Page
|
Stories in this Section |
|
The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription Group Sites: The Hindu | Business Line | The Sportstar | Frontline | The Hindu eBooks | Home |
Copyright © 2004, The
Hindu Business Line. Republication or redissemination of the contents of
this screen are expressly prohibited without the written consent of
The Hindu Business Line
|