The Hindu Business Line : Statement of equivalent production

The details presented in Table 1 relate to the work done in Process `A' of XYZ Company during March 2007. You are required to prepare: i) statement of equivalent production; ii) statement of cost; iii) statement of distribution cost; and iv) process `A' account, and normal and abnormal loss accounts.

Solution: Working Note (WN) 1: Opening WIP: Degree of completion is not given in the question. Hence, the average cost method is followed in solving the problem.

WN2: Opening work-in-progress (WIP) 2,000 units + input 38,000 units = total input, 40,000 units.

The statement of equivalent production (EQP) under the average cost method and the statement of cost are presented in Tables 2 and 3. The statement of distribution of cost: (in rupees lakh) is as follows:

Value of output transferred to B (35000 units x 80) = Rs 28 lakh

Value of abnormal loss: Material (1000 x 40) = Rs 40,000

Labour (800 x 10) = Rs 8,000

Overheads (800 x 30) = Rs 24,000

Sub-total = Rs 0.72 lakh

Value of Closing WIP: Material (2000 x 40) = Rs 80,000

Labour (1600 x 10) = Rs 16,000

Overheads (1600 x 30) = Rs 48,000

Sub-total = Rs 1.44 lakh

Process `A', Normal Loss and Abnormal Loss Accounts are presented in Tables 4, 5 and 6 respectively.

Note: This problem is similar (only the figures have been doubled) to one that appeared in the December 2000 ICWA (Intermediate) examination.

Material Mix

Raw Materials `AXE' costing Rs150 per kg and `BXE' costing Rs 90 per kg are mixed in equal proportion for making product `A'. The loss of material in processing works out to 25 per cent of the product. The production expenses are allocated at 40 per cent of direct material cost. The end product is priced with a margin of 20 per cent over the total cost.

Material `BXE' is not easily available and substitute raw material `CXE', costing Rs 75 per kg, has been found for `BXE'. It is required to keep the proportion of this substitute material in the mixture as low as possible and, at the same time, maintain the selling price of the end-product at existing level and ensure the same quantum of profit as at present. You are required to compute the ratio of the mix of the raw materials `AXE' and `CXE'.

Solution: The ratio of raw materials AXE & CXE: Minimum quantity of CXE is to be mixed so as to maintain the selling price and profit. For this, total material cost in 1 kg of product A should be the same, that is, Rs 150 only. Cost of CXE is Rs 75 per kg. CXE kg x Rs 75 (1.250 - CXE) kg x Rs150 = Rs 150

75 CXE + 187.50 - 150 CXE = Rs 150

187.50 - 150 = 150 CXE - 75 CXE

37.50 = 75 CXE

CXE = 37.50 / 75 = 0.50 kg

AXE (balancing figure) = 0.75 kg; Total = 1.25 kg

Ratio of mix of raw material AXE and CXE: AXE = 0.75 kg and CXE = 0.50 kg

AXE:CXE = 3:2