Cost and Management Accounting 2080 Board Question Paper

Two primary objectives of cost accounting are:

1. Ascertainment of Cost: To determine the exact cost of producing each unit, process, contract, or job through systematic cost accumulation and classification.
2. Cost Control and Reduction: To provide standards and budgets that guide managers in identifying inefficiencies, eliminating operational wastes, and driving down unit costs permanently.

A semi-variable cost (or mixed cost) contains both a fixed component that remains constant regardless of volume and a variable component that changes in proportion to changes in production output.

Examples:

• Telephone / Internet Bill: A fixed monthly landline rental charge plus a variable charge per minute or gigabyte consumed.
• Electricity Expense: A fixed minimum service meter connection fee plus variable unit consumption charges (per kWh).

ABC Analysis (Always Better Control) is an inventory categorization technique based on Pareto’s $80/20$ rule that classifies inventory items according to their annual monetary consumption value:

• Category A: High-value items representing roughly $70\%-80\%$ of total inventory value but only $10\%-15\%$ of total items. Requires strict, continuous control and low safety stocks.
• Category B: Moderate-value items representing $15\%-20\%$ of value and $20\%-30\%$ of items. Requires periodic review.
• Category C: Low-value items accounting for only $5\%-10\%$ of total value but $60\%-70\%$ of physical items. Requires simple, decentralized control and bulk purchases.

Causes of labour turnover are classified into two broad categories:

1. Avoidable Causes: Low wage rates compared to industry standards, poor working environment, lack of promotional growth, unfair grievance redressal, and bad supervision.
2. Unavoidable Causes: Superannuation (retirement), employee death or permanent disability, marriage or family relocation, and dismissal due to gross indiscipline.

Given:

• $\text{Carrying Cost per unit } (c) = \text{Rs. } 0.50$
• $\text{Ordering Cost per order } (O) = \text{Rs. } 40$
• $\text{EOQ} = 1,000\text{ units}$

Formula:

$$\text{EOQ} = \sqrt{\frac{2AO}{c}}$$

$$1,000 = \sqrt{\frac{2 \times A \times 40}{0.50}} = \sqrt{\frac{80A}{0.50}} = \sqrt{160A}$$

Squaring both sides:

$$1,000,000 = 160A$$

$$A = \frac{1,000,000}{160} = \mathbf{6,250\text{ units}}$$

$$\mathbf{\text{Annual Requirement } (A) = 6,250\text{ units}}$$

Step 1: Calculate Variable Cost per unit ($b$):

$$b = \frac{\text{Change in Total Cost}}{\text{Change in Output Units}} = \frac{\text{Rs. } 60,000 - \text{Rs. } 40,000}{4,000 - 2,000} = \frac{\text{Rs. } 20,000}{2,000} = \mathbf{\text{Rs. } 10\text{ per unit}}$$

Step 2: Calculate Fixed Cost ($a$):

$$a = \text{Total Cost} - (\text{Output} \times b) = 40,000 - (2,000 \times 10) = 40,000 - 20,000 = \mathbf{\text{Rs. } 20,000}$$

Step 3: Total Cost for 3,000 units:

$$\text{Total Cost} = a + (b \times X) = 20,000 + (3,000 \times 10) = 20,000 + 30,000 = \mathbf{\text{Rs. } 50,000}$$

Given:

• $\text{Standard Time Allowed } (S) = 150\text{ hours}$
• $\text{Time Saved} = 20\text{ hours}$
• $\text{Actual Time Taken } (T) = S - \text{Time Saved} = 150 - 20 = 130\text{ hours}$
• $\text{Wage Rate per hour } (R) = \text{Rs. } 30$

Calculations under Rowan Plan:

1. Basic Time Wages:

   $$\text{Time Wages} = T \times R = 130\text{ hrs} \times \text{Rs. } 30 = \text{Rs. } 3,900$$

2. Rowan Bonus:

   $$\text{Bonus} = \frac{\text{Time Saved}}{S} \times T \times R = \frac{20}{150} \times 130 \times 30 = \frac{2}{15} \times 3,900 = \text{Rs. } 520$$

$$\mathbf{\text{Total Earnings}} = 3,900 + 520 = \mathbf{\text{Rs. } 4,420}$$

Given:

• $\text{Maximum Consumption} = 50,000\text{ units/day}$, $\text{Minimum Consumption} = 30,000\text{ units/day}$
• $\text{Maximum Re-order Period} = 5\text{ days}$, $\text{Minimum Re-order Period} = 3\text{ days}$
• $\text{Maximum Stock Level} = 300,000\text{ units}$

Step 1: Compute Re-order Level (ROL):

$$\text{ROL} = \text{Maximum Consumption} \times \text{Maximum Re-order Period} = 50,000 \times 5 = 250,000\text{ units}$$

Step 2: Compute Re-order Quantity (ROQ):

$$\text{Maximum Stock Level} = \text{ROL} + \text{ROQ} - (\text{Minimum Consumption} \times \text{Minimum Lead Time})$$

$$300,000 = 250,000 + \text{ROQ} - (30,000 \times 3)$$

$$300,000 = 250,000 + \text{ROQ} - 90,000$$

$$300,000 = 160,000 + \text{ROQ}$$

$$\mathbf{\text{ROQ}} = 300,000 - 160,000 = \mathbf{140,000\text{ units}}$$

Analysis of Costs: In labour turnover costing, total costs are bifurcated into Preventive Costs (e.g., welfare services, medical facilities) and Replacement Costs (costs incurred to replace separated workers):

• Selection Cost $= \text{Rs. } 25,000$
• Training Cost $= \text{Rs. } 20,000$
• Loss due to Inefficiency of New Recruits $= \text{Rs. } 20,000$
• Total Replacement Cost $= 25,000 + 20,000 + 20,000 = \mathbf{\text{Rs. } 65,000}$ (Note: Welfare services of Rs. 22,500 are preventive costs).

Calculation:

$$\mathbf{\text{Replacement Cost per Replacement}} = \frac{\text{Total Replacement Cost}}{\text{Number of Workers Replaced}} = \frac{\text{Rs. } 65,000}{200\text{ workers}} = \mathbf{\text{Rs. } 325.00}$$

(If all listed costs are pooled: $\text{Rs. } 87,500 / 200 = \text{Rs. } 437.50$).

Cost-Volume-Profit Analysis (Two-Period Data)

Preliminary Computations:

$$\text{Sales} = \text{Total Cost} + \text{Profit}$$

• Year 2076 Sales $= 400,000 + 50,000 = \text{Rs. } 450,000$
• Year 2077 Sales $= 600,000 + 100,000 = \text{Rs. } 700,000$
• $\Delta \text{Sales} = 700,000 - 450,000 = \text{Rs. } 250,000$
• $\Delta \text{Profit} = 100,000 - 50,000 = \text{Rs. } 50,000$

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1. Profit-Volume (P/V) Ratio

$$\mathbf{\text{P/V Ratio}} = \frac{\Delta \text{Profit}}{\Delta \text{Sales}} \times 100 = \frac{\text{Rs. } 50,000}{\text{Rs. } 250,000} \times 100 = \mathbf{20\%}$$

2. Total Fixed Cost

$$\text{Fixed Cost} = (\text{Sales} \times \text{P/V Ratio}) - \text{Profit}$$

Using Year 2076:

$$\mathbf{\text{Fixed Cost}} = (450,000 \times 20\%) - 50,000 = 90,000 - 50,000 = \mathbf{\text{Rs. } 40,000}$$

3. Break-Even Point (BEP) in Rs.

$$\mathbf{\text{BEP (Rs.)}} = \frac{\text{Fixed Cost}}{\text{P/V Ratio}} = \frac{\text{Rs. } 40,000}{0.20} = \mathbf{\text{Rs. } 200,000}$$

4. Sales to Make a Profit of Rs. 75,000 After Tax (Tax = 25%)

$$\text{Required Sales} = \frac{\text{Fixed Cost} + \frac{\text{Desired Profit After Tax}}{1 - t}}{\text{P/V Ratio}}$$

$$\text{Required Sales} = \frac{40,000 + \frac{75,000}{1 - 0.25}}{0.20} = \frac{40,000 + 100,000}{0.20} = \frac{140,000}{0.20} = \mathbf{\text{Rs. } 700,000}$$

5. Margin of Safety if Profit of Rs. 125,000 is Earned

$$\mathbf{\text{Margin of Safety (Rs.)}} = \frac{\text{Profit}}{\text{P/V Ratio}} = \frac{\text{Rs. } 125,000}{0.20} = \mathbf{\text{Rs. } 625,000}$$

Solution: Income Statements for Year 2077

Working Notes:

1. Inventory Movement for Year 2077:

   • 2076 Closing Stock (Opening Stock of 2077) $= 25,000 - 20,000 = 5,000\text{ units}$
   • 2077 Production $= 25,000\text{ units}$
   • 2077 Sales $= 26,000\text{ units}$
   • 2077 Closing Stock $= 5,000 + 25,000 - 26,000 = \mathbf{4,000\text{ units}}$

2. Unit Costs:

   • Variable Mfg Cost per unit $= 8 + 4 + 5 = \mathbf{\text{Rs. } 17.00}$
   • Fixed Mfg OH per unit (Standard) $= \mathbf{\text{Rs. } 5.00}$ (Normal capacity 30,000 units $\implies$ Total Budgeted Fixed OH $= 30,000 \times 5 = \text{Rs. } 150,000$)
   • Total Unit Mfg Cost (Absorption) $= 17 + 5 = \mathbf{\text{Rs. } 22.00}$
   • Variable Selling Expense $= 5\% \text{ of Rs. } 30 = \mathbf{\text{Rs. } 1.50\text{ per unit}}$

3. Fixed Overhead Under/Over Absorption for 2077:

   • Fixed OH Absorbed $= 25,000 \times 5 = \text{Rs. } 125,000$
   • Actual Fixed OH Incurred $= \text{Rs. } 150,000$
   • $\mathbf{\text{Under-absorbed Fixed Overhead}} = 150,000 - 125,000 = \mathbf{\text{Rs. } 25,000\text{ (Unfavorable)}}$

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(a) Income Statement under Absorption Costing (Year 2077)

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(b) Profit under Variable Costing (Year 2077)

Income Statement under Variable Costing:

• Sales Revenue $= \text{Rs. } 780,000$
• Variable COGS:
  • Opening Stock ($5,000 \times 17$) $= 85,000$
  • Current Production ($25,000 \times 17$) $= 425,000$
  • Less Closing Stock ($4,000 \times 17$) $= (68,000)$
  • Variable COGS $= \text{Rs. } 442,000$
• Gross Contribution Margin $= 780,000 - 442,000 = \text{Rs. } 338,000$
• Less: Variable Selling Expenses ($26,000 \times 1.50$) $= (39,000)$
• Net Contribution Margin $= \mathbf{\text{Rs. } 299,000}$
• Less: Fixed Costs (Period Costs):
  • Fixed Manufacturing Overhead $= 150,000$
  • Fixed Admin & Selling Expenses $= 72,000$
• Total Fixed Costs $= \text{Rs. } 222,000$
• Net Operating Income (Variable Costing) $= 299,000 - 222,000 = \mathbf{\text{Rs. } 77,000}$

(Reconciliation check: Profit difference $= 77,000 - 72,000 = \text{Rs. } 5,000 = (5,000 - 4,000) \times \text{Rs. } 5$ Fixed OH).

Cost Per Unit: Conventional Method vs. ABC

Total Overhead Cost $= 250,000 + 300,000 + 300,000 = \mathbf{\text{Rs. } 850,000}$ Total Machine Hours $= 2,000 + 3,000 = 5,000\text{ hours}$

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1. Conventional Costing Method (Based on Machine Hours)

$$\text{Blanket Overhead Rate} = \frac{\text{Total Overhead}}{\text{Total Machine Hours}} = \frac{\text{Rs. } 850,000}{5,000\text{ hrs}} = \mathbf{\text{Rs. } 170\text{ per MH}}$$

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2. Activity-Based Costing (ABC) Method

Step 1: Calculate Cost Driver Rates

1. Maintenance Rate $= \frac{\text{Rs. } 250,000}{5,000\text{ MH}} = \mathbf{\text{Rs. } 50\text{ per MH}}$
2. Setup Rate $= \frac{\text{Rs. } 300,000}{20 + 40 = 60\text{ runs}} = \mathbf{\text{Rs. } 5,000\text{ per production run}}$
3. Procurement Rate $= \frac{\text{Rs. } 300,000}{60 + 90 = 150\text{ orders}} = \mathbf{\text{Rs. } 2,000\text{ per order}}$

Step 2: Assign Overhead and Compute Cost Per Unit

(a) Operating Cost Statement for Harati Yatayat Sewa

Working Notes:

1. Total Annual Kilometers:

   • Daily distance $= 6\text{ round trips} \times (2 \times 15\text{ km}) = 6 \times 30 = 180\text{ km/day}$
   • Monthly distance $= 180\text{ km} \times 25\text{ days} = 4,500\text{ km}$
   • Annual distance $= 4,500 \times 12 = \mathbf{54,000\text{ km}}$

2. Annual Depreciation on Bus:

   $$\text{Depreciation} = \frac{\text{Cost} - \text{Scrap Value}}{\text{Life}} = \frac{660,000 - 60,000}{10\text{ years}} = \mathbf{\text{Rs. } 60,000\text{ per annum}}$$

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Operating Cost Statement (Per Annum)

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(b) Concepts of Main Product, Joint Product, and By-Product

1. Main Product: The primary output of substantial economic value and high commercial quantity for which the manufacturing facility was intentionally established (e.g., sugar in a sugar mill, refined gasoline in an oil refinery).
2. Joint Products: Two or more distinct products of approximately equal economic value that emerge simultaneously from a common raw material process up to a split-off point (e.g., gasoline, diesel, and kerosene from crude oil distillation; butter and cheese from milk processing).
3. By-Product: An incidental or secondary output of minor commercial value and small volume resulting inevitably from the manufacture of the main product (e.g., bagasse and molasses from sugar refining, sawdust in a sawmill).

(a.1) Merchandize Purchase Budget (Cost Basis)

Gross profit margin $= 40\% \implies \text{Cost of Goods Sold (COGS)} = 100\% - 40\% = 60\% \text{ of Sales}$.

• Jan COGS $= 60\% \times 800,000 = \text{Rs. } 480,000$
• Feb COGS $= 60\% \times 700,000 = \text{Rs. } 420,000$
• March COGS $= 60\% \times 600,000 = \text{Rs. } 360,000$
• April COGS $= 60\% \times 6,000,000 = \text{Rs. } 3,600,000$

Policy: Ending Inventory $= \text{Next month's COGS}$.

• Jan Ending Inventory $= \text{Rs. } 420,000$; Opening $= \text{Rs. } 480,000$
• Feb Ending Inventory $= \text{Rs. } 360,000$; Opening $= \text{Rs. } 420,000$
• March Ending Inventory $= \text{Rs. } 3,600,000$; Opening $= \text{Rs. } 360,000$

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(a.2) Operating and Selling Expenses Budget

• Operating Expenses $= 10\% \text{ of Sales}$
• Selling Expenses $= 20\% \text{ of Sales}$
• Total Operating & Selling Expenses $= 30\% \text{ of Sales}$

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(b) Standard Costing vs. Estimated Costing

Meaning of Standard Costing: Standard costing is a control technique that pre-establishes scientifically determined target costs for each product under efficient operating conditions, compares actual results against these benchmarks, analyzes variances, and triggers managerial corrective actions.

Management Accounting: Definition and Reasons for Rising Popularity

Definition

Management accounting is the process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of financial and non-financial information used by internal management to plan, evaluate, and control an organization and ensure appropriate use of its resources.

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Key Reasons for Gaining Tremendous Popularity in Modern Business

1. Shift from Cost-Plus Pricing to Market-Driven Pricing: Global competition and informed customers prevent companies from dictating prices. Survival demands aggressive cost management, driving demand for management accounting tools like Target Costing and Value Chain Analysis.

2. Transition toward Automation and High Overheads: Traditional cost systems based on direct labor fail in automated smart factories where overhead represents over $70\%$ of total product cost. Management accounting’s Activity-Based Costing (ABC) provides accurate, non-distorted cost intelligence.

3. Dynamic Multi-Product Decision Environments: Firms must continually navigate non-routine choices: make-or-buy components, accept special discount orders, discontinue lagging products, or outsource logistics. Management accounting provides rigorous differential cost and contribution analysis.

4. Adoption of Management by Exception (MBE): Top executives have limited time to inspect every operating line. Management accounting’s variance reporting flags only critical deviations, saving executive bandwidth.

5. Focus on Strategic Performance Metrics (Beyond Financial Net Profit): Modern management accounting integrates forward-looking non-financial performance indicators through frameworks like the Balanced Scorecard, aligning day-to-day work with long-term strategy.

Inter-Process Profit Accounting

(a) Process I Account

• Opening Stock $= \text{Rs. } 20,000$ (No inter-process profit).
• Material $= \text{Rs. } 90,000$; Wages $= \text{Rs. } 50,000$.
• Total Prime Cost $= 20,000 + 90,000 + 50,000 = \text{Rs. } 160,000$.
• Less: Closing Stock (at prime cost) $= \text{Rs. } 50,000$.
• Net Prime Cost $= \text{Rs. } 110,000$.
• Add: Factory Overhead $= \text{Rs. } 30,000$.
• Total Cost of Process I $= \text{Rs. } 140,000$.
• Profit on transfer to Process II $= 25\% \text{ on cost} = 140,000 \times 25\% = \mathbf{\text{Rs. } 35,000}$.
• Transfer Price to Process II $= 140,000 + 35,000 = \mathbf{\text{Rs. } 175,000}$.

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(b) Process II Account

• Opening Stock $= \text{Total Rs. } 25,000$ (Cost $= 20,000$; Profit $= 5,000$).
• Transfer from Process I $= \text{Total Rs. } 175,000$ (Cost $= 140,000$; Profit $= 35,000$).
• Direct Material $= \text{Rs. } 60,000$; Direct Wages $= \text{Rs. } 40,000$.
• Total before Closing Stock:
  • Total $= 25,000 + 175,000 + 60,000 + 40,000 = \text{Rs. } 300,000$.
  • Cost $= 20,000 + 140,000 + 60,000 + 40,000 = \text{Rs. } 260,000$.
  • Profit $= 5,000 + 35,000 = \text{Rs. } 40,000$.
• Closing Stock in Process II $= \text{Rs. } 60,000$.
  • Profit in closing stock $= 60,000 \times \frac{40,000}{300,000} = \mathbf{\text{Rs. } 8,000}$.
  • Cost in closing stock $= 60,000 - 8,000 = \mathbf{\text{Rs. } 52,000}$.
• Net after Closing Stock: Total $= 240,000$, Cost $= 208,000$, Profit $= 32,000$.
• Add: Factory Overhead $= \text{Rs. } 20,000$ (Cost $= 20,000$).
• Total Cost before markup: Total $= \text{Rs. } 260,000$ (Cost $= 228,000$; Profit $= 32,000$).
• Profit transferred to Finished Stock $= 20\% \text{ on transfer price} = \frac{20}{80} \text{ on cost} = 25\% \text{ on cost}$:
  $$\text{Profit} = 260,000 \times \frac{20}{80} = \mathbf{\text{Rs. } 65,000}$$
• Transfer Price to Finished Stock $= 260,000 + 65,000 = \mathbf{\text{Rs. } 325,000}$ (Cost $= 228,000$; Profit $= 32,000 + 65,000 = 97,000$).

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(c) Finished Stock Account

• Opening Stock $= \text{Total Rs. } 40,000$ (Cost $= 30,000$; Profit $= 10,000$).
• Transfer from Process II $= \text{Total Rs. } 325,000$ (Cost $= 228,000$; Profit $= 97,000$).
• Total Available $= \text{Total Rs. } 365,000$ (Cost $= 258,000$; Profit $= 107,000$).
• Profit percentage in stock $= \frac{107,000}{365,000} = 29.315\%$.
• $80\%$ of goods sold:
  • Total Cost of Goods Sold $= 80\% \times 365,000 = \text{Rs. } 292,000$ (Cost $= 80\% \times 258,000 = 206,400$; Profit $= 80\% \times 107,000 = 85,600$).
  • Closing Stock ($20\%$) $= \text{Rs. } 73,000$ (Cost $= 51,600$; Profit $= 21,400$).
• Sales $= \text{Rs. } 350,000$.
• Trading Profit on Sales $= 350,000 - 292,000 = \mathbf{\text{Rs. } 58,000}$.

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(d) Actual Realized Profit

• Trading Profit on Sales $= \text{Rs. } 58,000$
• Inter-Process Profit realized through sales:
  • Process I Profit $= 35,000$
  • Process II Profit realized $= 65,000 + (40,000 - 8,000) = 97,000$
  • Profit in Finished Goods sold $= 85,600$
  • Stock Reserve Opening (unrealized profit) $= 5,000 + 10,000 = \text{Rs. } 15,000$
  • Stock Reserve Closing (unrealized profit) $= 8,000 + 21,400 = \text{Rs. } 29,400$
  • Increase in Unrealized Reserve $= 29,400 - 15,000 = \text{Rs. } 14,400$
• Total Realized Profit $= \text{Book Profit} - \text{Increase in Reserve}$$= (35,000 + 65,000 + 58,000) - 14,400 = 158,000 - 14,400 = \mathbf{\text{Rs. } 143,600}$$

Comprehensive Standard Costing and Variance Analysis

Part 1: Budget for 30,000 DLH

1. Direct Labour Cost at 30,000 DLH: Standard gang $= 2\text{ skilled} + 3\text{ semi-skilled} + 4\text{ unskilled} = 9\text{ workers}$. Standard cost per hour of gang $= (2 \times 2) + (3 \times 1) + (4 \times 0.5) = 4 + 3 + 2 = \text{Rs. } 9\text{ for } 9\text{ hours} = \mathbf{\text{Rs. } 1.00\text{ per DLH}}$.

   $$\mathbf{\text{Direct Labour Budget for 30,000 DLH}} = 30,000 \times \text{Rs. } 1.00 = \mathbf{\text{Rs. } 270,000}$$

2. Factory Overhead Segregation (High-Low Method between 20k and 40k DLH):

   • Indirect Materials: $\Delta \text{Cost} = 80k - 60k = 20k / 20k = \text{Rs. } 1/\text{DLH}$; Fixed $= 60k - 20k = \text{Rs. } 40,000$.
   • Supervision Cost: $\Delta \text{Cost} = 60k - 40k = 20k / 20k = \text{Rs. } 1/\text{DLH}$; Fixed $= 40k - 20k = \text{Rs. } 20,000$.
   • Repairs & Maint: $\Delta \text{Cost} = 100k - 60k = 40k / 20k = \text{Rs. } 2/\text{DLH}$; Fixed $= 60k - 40k = \text{Rs. } 20,000$.
   • Rent and Taxes: Purely Fixed $= \text{Rs. } 20,000$.
   • Depreciation: Purely Fixed $= \text{Rs. } 40,000$.
   • Total Fixed Overhead $= 40,000 + 20,000 + 20,000 + 20,000 + 40,000 = \mathbf{\text{Rs. } 140,000}$.
   • Total Variable Overhead Rate $= 1 + 1 + 2 = \mathbf{\text{Rs. } 4.00\text{ per DLH}}$.
   • Factory Overhead Budget for 30,000 DLH:
     $$\text{Overhead Budget} = 140,000 + (30,000 \times 4) = 140,000 + 120,000 = \mathbf{\text{Rs. } 260,000}$$

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Part 2: Direct Labour Variances

Standard Gang Ratio $= 2 : 3 : 4$ (Total $= 9$). Standard Rates: Skilled = Rs. 2, Semi = Rs. 1, Unskilled = Rs. 0.50. Actual Hours Paid $= 32,000\text{ DLH}$. Actual hours per category:

• Skilled: $128,000 / 2 = 64,000$ DLH? (Note: The gang of 2 workers paid Rs. 128,000 @ Rs. 2 = 64,000 hrs; Semi-skilled: $96,000 / 1.5 = 64,000$ hrs; Unskilled: $144,000 / 0.9 = 160,000$ hrs; scaled proportionally to 32,000 DLH total):
  • Actual Hours ($AH$): Skilled $= \frac{2}{9} \times 32,000 = 7,111\text{ hrs}$; Semi $= 10,667\text{ hrs}$; Unskilled $= 14,222\text{ hrs}$.
  • Total Actual Cost Incurred $= \text{Rs. } 368,000$.
  • Standard Hours Produced ($SH$) $= 28,000\text{ DLH}$.
  • Standard Cost of Production $= 28,000 \times \text{Rs. } 1.00 = \text{Rs. } 28,000$.

1. Labour Cost Variance (LCV) $= \text{Std Cost} - \text{Actual Cost} = (28,000 \times 1) - 368,000 = \mathbf{\text{Rs. } 340,000\text{ (A)}}$.
2. Labour Efficiency Variance (LEV) $= (SH - AH) \times SR = (28,000 - 32,000) \times 1 = \mathbf{\text{Rs. } 4,000\text{ (A)}}$.
3. Labour Rate Variance (LRV) $= \text{LCV} - \text{LEV} = -340,000 - (-4,000) = \mathbf{\text{Rs. } 336,000\text{ (A)}}$.

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Part 3: Three Overhead Variances

• Normal Capacity $= 35,000\text{ DLH}$. Budgeted Fixed OH $= \text{Rs. } 140,000 \implies$ Standard Fixed OH Rate $= \frac{140,000}{35,000} = \text{Rs. } 4.00$.
• Standard Variable OH Rate $= \text{Rs. } 4.00$.
• Total Standard Overhead Rate $= 4.00 + 4.00 = \mathbf{\text{Rs. } 8.00\text{ per DLH}}$.
• Actual Overhead Incurred $= \text{Rs. } 300,000$.
• Standard Hours Allowed for Production $= 28,000\text{ DLH}$.
• Actual Hours Worked $= 32,000\text{ DLH}$.

1. Overhead Spending (Budget) Variance:

   $$\text{Flexible Budget for Actual Hours (32,000)} = 140,000 + (32,000 \times 4) = \text{Rs. } 268,000$$
   $$\mathbf{\text{Spending Variance}} = \text{Budget Allowed} - \text{Actual Overhead} = 268,000 - 300,000 = \mathbf{\text{Rs. } 32,000\text{ (A)}}$$

2. Overhead Efficiency Variance:

   $$\mathbf{\text{Efficiency Variance}} = (\text{Std Hours Allowed} - \text{Actual Hours}) \times \text{Std OH Rate} = (28,000 - 32,000) \times 8 = \mathbf{\text{Rs. } 32,000\text{ (A)}}$$

3. Overhead Capacity (Volume) Variance:

   $$\mathbf{\text{Capacity Variance}} = (\text{Actual Hours} - \text{Budgeted Hours}) \times \text{Std Fixed OH Rate} = (32,000 - 35,000) \times 4 = \mathbf{\text{Rs. } 12,000\text{ (A)}}$$

Check: Total Overhead Variance $= (28,000 \times 8) - 300,000 = 224,000 - 300,000 = \text{Rs. } 76,000\text{ (A)} = -32,000 - 32,000 - 12,000 = -76,000$.

(a) Job Order Costing: Meaning and Distinctive Features

Meaning: Job order costing is a method of specific order costing applied in industries where production is executed against specific customer orders and specifications. Each job is distinct, identifiable from start to completion, and treated as an independent cost unit (e.g., printing presses, custom furniture, automobile repair, foundry works).

Key Features:

1. Specific Customer Order Driven: Production is non-continuous and commences only after receiving a tailored order from a specific client.
2. Distinct Job Identity: Each job retains its unique identity and job number throughout the manufacturing cycle.
3. Accumulation via Job Cost Sheet: All direct materials issued, direct labor hours clocked, and overheads absorbed are tracked on an individual Job Cost Sheet.
4. Ascertainment of Individual Job Profit: Profit or loss is determined separately for each individual job immediately upon completion and delivery.

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(b) Cost Reduction vs. Cost Control

Definition of Cost Reduction: Cost reduction is the accomplishment of a real, permanent reduction in unit costs of goods manufactured or services rendered without compromising their functional utility, quality, safety, or aesthetic appeal.

Differences between Cost Control and Cost Reduction