The Hindu Business Line : There is no one right answer

Treatment of Rs 18,000: Alternative 1: Considering the ledger account, the total sum on the credit side equals Rs 24,000. Hence, the standard cost per kg = 24,000/1,000 = Rs 24. Alternatively, the actual value of purchases is Rs 34,800. If Rs 18,000 is considered to be an issue to WIP, then the standard issue = Rs 18,000 - Rs 1,200 = Rs 16,800. The balancing figure in the ledger then will be the material rate variance. This is computed as follows:

Material rate variance = opening balance + purchases - quantity variance - issue to WIP - closing balance

= 0 + 34,800 - 1200 - 16,800 - 6,000 = Rs 10,800 (A)

Hence, the standard cost of actual purchases will be Rs 34,800 - Rs 10.800 = Rs 24,000, which satisfy the standard price per kg of Rs 24.

Alternative 2: If the issue to WIP is taken at Rs 18,000, the rate variance will be Rs 9,600(A)

In that case, the standard cost of actual purchases will be Rs 34,800 - Rs 9,600 = Rs 25,200. The standard price per kg = Rs 25,200/1000 = Rs 25.2

In this case the quantities issued to WIP in the closing balance will be in fractions.

The quantity issued will be Rs 19,200 / 25.2 = 762 kg (rounded off)

Closing stock will be 1,000 - 762 = 238 kg.

Comparative cost statement

A BUSINESSMAN employs 20 sewing machinists, but he is aware that 10 of them are better workers.

He is considering conducting a training programme for the 10 less-efficient machinists so as to raise their efficiency level to that achieved by the "better" workers. The relevant data are as follows:

There is one sewing machine for each machinist.

All the machinists are engaged in similar work and are paid Rs 2.20 for each good garment produced on piecework system.

To rectify each rejected garment costs Rs 4. This work is done by a subcontractor.

The garment-machining department works 2,000 hours a year.

The average output of per machinist (on the basis of all 20 machinists) is 12 good garments with one rejected per worker per hour. However, 10 less-efficient machinists average only 20 good garments with 1.5 rejected per worker per hour.

Depreciation of each sewing machine is Rs 10,000 per year and the variable cost of power, cleaning and preventive maintenance is Rs 5 per hour per machine.

Fixed production overhead other than depreciation is Rs 20 per machine hour.

Selling price per garment is Rs 18.

Direct material cost per garment is Rs 12.

Training will not reduce the productive hours.

There is no problem in selling increased output.

Prepare a statement of comparative costs, excluding material cost, for the better and less-efficient workers. Find the benefit derived over a one-year period if Rs 1,00,000 is spent on a training course for the less-efficient workers to match the efficiency with the better workers.

In this problem, which was asked in November 1993 CIMA examination, the solution for the first part, that is, comparative cost statement, depreciation as well as fixed production overhead were excluded. As regards the second part of the problem, the solution was worked out by computing the total contribution and finding out the difference. The second part can be worked out through the relevant cost approach, that is, considering the incremental contribution on the extra production and the savings on the reduction in the number of rejected garments.

The data on machine hours and the comparative cost statements are presented in Tables 1 and 2.

On training given to the less-efficient workers, the incremental profitability is as shown in Table 3.

Decision: Better to implement training.

(Concluded)

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