INTERMEDIATE EXAMINATION SET - 2

MODEL ANSWERS TERM – JUNE 2025

PAPER – 8 SYLLABUS 2022
COST ACCOUNTING
Time Allowed: 3 Hours Full Marks: 100
The figures in the margin on the right side indicate full marks.

SECTION – A (Compulsory)
1. Choose the correct option: [15 x 2 = 30]

(i) In the context of cost elements, which category includes the cost of raw materials, direct labour,
and direct expenses?
a. Prime Cost
b. Conversion Cost
c. Overhead Cost
d. Indirect Cost
(ii) Absorption costing is also referred as _______.
a. Historical costing
b. Traditional costing
c. Full costing
d. All of the above terms
(iii) Danger Level = _________ × Maximum Re-Order Period for emergency purchases
a. Normal Rate of Consumption
b. Maximum Rate of Consumption
c. Minimum Rate of Consumption
d. Consumption during Lead Time
(iv) If the gross profit is ₹ 40,000, selling expenses are ₹ 10,000, and administrative expenses are ₹
5,000, what is the net profit?
a. ₹ 40,000
b. ₹ 35,000
c. ₹ 25,000
d. ₹ 15,000
(v) Opening Stock ₹ 10,000, Closing Stock ₹ 16,000 and Material Consumed ₹ 78,000. What will be
the inventory turnover ratio?
a. 8 Times
b. 5Times
c. 3 Times
d. 6 Times
(vi) Which method of absorption of factory overheads do you suggest in a concern which produces
only one uniform type of product?
a. Percentage of direct wages basis
b. Direct labour rate
c. Machine hour rate
d. A rate per units of output

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – JUNE 2025
PAPER – 8 SYLLABUS 2022
COST ACCOUNTING
(vii) Normal capacity of a plant refers to the difference between:
a. Maximum capacity and practical capacity
b. Maximum capacity and actual capacity
c. Practical capacity and estimated idle capacity as revealed by long term sales trend
d. Practical capacity and normal capacity

(viii) CAS 20 specifically deals with:

a. Joint Costs
b. Royalty and Technical Know How Fee
c. Quality Control
d. Manufacturing Cost

(ix) ________________ nominee required from the regulate like CAG, RBI to the CASB Board.
a. 4
b. 3
c. 2
d. 6

(x) In Reconciliation Statements, expenses shown only in financial accounts are:

a. Added to financial profit
b. Deducted from financial profit
c. Ignored
d. Added to costing profit

(xi) A company calculates the prices of jobs by adding overheads to the prime cost and adding 30%
to total costs as a profit margin. Job number Y256 was sold for ₹1,690 and incurred overheads of
₹ 694. What was the prime cost of the job?
a. ₹ 489
b. ₹ 606
c. ₹ 996
d. ₹ 1,300

(xii) The Absolute Tonne-Km is an example of:

a. Composite unit for bus operation
b. Composite unit of transport sector
c. Composite unit for oil and natural gas
d. Composite unit in power sector

(xiii) The technique of differential cost is adopted when:

a. To ascertain P/V ratio
b. To ascertain marginal cost
c. To ascertain cost per unit
d. To make choice between two or more alternative courses of action

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – JUNE 2025
PAPER – 8 SYLLABUS 2022
COST ACCOUNTING
(xiv) Standard price of material per kg ₹ 20, standards consumption per unit of production is 5 kg.
Standard material cost for producing 100 units is:
a. ₹ 20,000
b. ₹ 12,000
c. ₹ 8,000
d. ₹ 10,000

(xv) The operations to produce a unit of product L require 9 active hours. Budgeted idle time of 10%
of total hours paid for is to be incorporated into the standard times for all products. The wage
rate is ₹ 4 per hour. The standard labour cost of one unit of product L is:
a. ₹10
b. ₹36
c. 39.6
d. 40

Answer:

(i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) (xii) (xiii) (xiv) (xv)
a d a c d d c b a a b b d d d

SECTION - B
(Answer any five questions out of seven questions given. Each question carries 14 Marks) [5x14=70]

2. (a) The following financial parameters of ZONB Ltd. are available for the month of September 2024.
Direct Labour Cost: ₹ 1,20,000 (120% of Factory overheads)
Raw Materials Purchased: ₹ 1,65,000
Sales: ₹ 5,00,000
Cost of Sales : ₹ 4,00,000
Accounts shows the following figures:
1st September 2024 (₹) 30th September 2024 (₹)
Inventory:
Raw material 20,000 35,000
Work-in-progress 20,000 30,000
Finished goods 50,000 60,000
Other details:
Selling expenses 22,000
General & Admin expenses 18,000
General & Admin expenses are not relating to the production activity.

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – JUNE 2025
PAPER – 8 SYLLABUS 2022
COST ACCOUNTING
Illustrate a Cost Sheet for the month of September 2024 showing:
(i) Prime cost
(ii) Work cost
(iii) Cost of goods sold
(iv) Cost of sales and profit earned [7]

(b) ZINTES LTD. a manufacturing company has its factories at two locations. Rowan plan is in use
at location A and Halsey plan at location B. Standard time and basic rate of wages are same for a
job which is similar and is carried out on similar machinery. Time allowed is 60 hours.
Job at location A is completed in 36 hours while at B, it has taken 48 hours. Conversion costs at
respective places are ₹1224 and ₹1500. Overheads amount to ₹20 per hour.
(i) Calculate the normal wage rate, and
(ii) Compare conversion costs. [7]

Answer:

(a)
Cost Sheet for the month of September 2024:
Particulars (₹)
Opening Stock of Raw Material 20,000
Add : Purchases 1,65,000
Less : Closing Stock of Raw Material (35,000)
Raw Material Consumed 1,50,000
Add : Direct Labour Cost 1,20,000
Prime Cost 2,70,000
Add : Factory Overheads 1,00,000
Gross Work Cost 3,70,000
Add : Opening Work – in – progress 20,000
Less : Closing Work – in – progress (30,000)
Works Cost 3,60,000
Cost of Production 3,60,000
Add : Opening Stock of finished goods 50,000
Less : Closing Stock of finished goods (60,000)
Cost of Goods sold 3,50,000
Add : General and administration expenses 18,000
Add : Selling Expenses 22,000
Cost of Sales 3,90,000
Profit 1,10,000
Sales 5,00,000

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – JUNE 2025
PAPER – 8 SYLLABUS 2022
COST ACCOUNTING
Alternative:
Cost of Goods sold 3,50,000
Add : General and administration expenses 18,000
Add : Selling Expenses 22,000
Add : Distribution overhead 10,000
Cost of Sales 4,00,000
Profit 1,00,000
Sales 5,00,000

(b) (i) Let ₹ X per hour be the normal wage rate. Wage rate at location A will be ₹ 36x and at location B
- it will be ₹ 48x, on the basis of actual time taken, as against 60 hours permitted. For time saved,
bonus will be payable as under:
Location A:
Bonus under Rowan system = Time saved/Time allowed × Hrs. worked × Rate per hour
= 24/60 × ₹ 36 x
= ₹ 14.4x
Total wages = ₹ 36x + ₹14.4x
= 50.4x
Overheads @₹ 20 per hour worked = 36 hrs. × ₹ 20
= ₹ 720
Therefore, total conversion cost is (50.4x+ ₹ 720) = ₹ 1,224 or 50.4x = ₹ 504
Or x = ₹504/50.4 = ₹ 10
So, Bonus = 14.4x =14.4 × ₹ 10 = ₹ 144

Location B:
Bonus under Halsey plan = 50% of time saved × rate per hour = 50% of ₹ 12x = ₹6x
Total wages = ₹ 48x + ₹ 6x = ₹ 54x
Overheads @ ₹ 20 per hour = 48 hrs. × ₹ 20 = ₹ 960
Total conversion cost is (54x + ₹ 960) = ₹1,500 or 54x = ₹ 540
Hence, x = ₹ 540/54 = ₹ 10
Bonus = 6x = 6 × ₹10 =₹ 60

(ii) Comparative conversion cost:

Location→ A (Rowan) B (Halsey)
Amount→ ₹ ₹
Wages @ ₹10 per hour worked 360 480
Bonus 144 60
Overheads 720 960
Total 1,224 1,500

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – JUNE 2025
PAPER – 8 SYLLABUS 2022
COST ACCOUNTING
3. (a) In a machine department of a factory there are five identical machines.
Space of the department 10,000 Sq. mts.
Space occupied by the machine 2,000 Sq. mts.
Cost of the machine ₹ 20,000
Scrap value of the machine ₹ 300
Estimated life of the machine 13 years
Depreciation charged at 7 1/2% p.a.
Normal running of the machine 2,000 hours
Power consumed by the machine as shown by the meter ₹ 3,000 p.a.

Estimated repairs and maintenance throughout the working life of the machine ₹ 5,200. Sundry
supplies including oil, waste etc. charged direct to the machine amount to ₹ 600 p.a.
Other expenses of the department are:
Amount (₹)
Rent and Rates 9,000
Lighting (to be apportioned according to workers employed) 400
Supervision 1,250
Other charges 5,000
It is ascertained that the degree of supervision required by the machine is 2/5th and 3/5th being
devoted to other machines.
There are 16 workers in the department of whom 4 attended to the machine and the remaining to
the other machines.
Prepare the machine hour rate for one of the machines. [7]

(b) The net profit of X Ltd., appeared at ₹ 41,800 as per financial records for the year ending 31st
March, 2024. A scrutiny of the figures from both the sets of accounts revealed the following facts:
₹
Works overhead under-recovered in costs 1,500
Administrative overheads over-recovered in costs 850
Depreciation charged in financial accounts 5,600
Depreciation recovered in costs 6,250
Interest on investments not included in costs 3,000
Loss due to obsolescence charged in financial accounts 2,850
Income tax reserve made in financial accounts 20,150
Bank interest and transfer fee credited in financial books 370
Stores adjustment (credit) in financial books 230
Value of opening stock in : Cost accounts 24,800
: Financial accounts 26,300
Value of closing stock in : Cost accounts 25,000
: Financial accounts 23,000

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – JUNE 2025
PAPER – 8 SYLLABUS 2022
COST ACCOUNTING
Interest charged in cost accounts 2,000
Imputed rent charged in cost accounts 1,000
Goodwill written off 5,000
Loss on sale of furniture 600
Selling and distribution expenses not charged in cost accounts 10,000
Donations to Prime Minister's Relief Fund 5,100
Transfer to Debenture Redemption Fund 9,000
Transfer to Dividend Equalisation Fund 20,500

Prepare a statement showing the reconciliation statement and find out the profit as per cost
Accounts. [7]

Answer:

(a)
Computation of Machine Hour Rate
Particulars Cost per annum Total Amount (₹)
Amount (₹)
Standing Charges
Rent and Rates ₹ 9,000 ÷ 5 1,800
Lighting (4/16) × ₹ 400 100
Supervision ₹ 1,250 ×(2/5) 500
Other Charges ₹ 5,000 ÷ 5 1,000
Total Standing Charges 3,400
Machine Expenses
Depreciation ₹ 20,000 × 7.5% 1,500
Repair Maintenance ₹ 5,200 ÷ 13 years 400
Sundries 600
Power 3,000
Total Machine Expenses 4,500
Total Cost p.a. 8,900
Machine Hours 2,000
Machine Hour Rate ₹ 8,900 ÷ 2,000 ₹ 4.45 per hour

(b)
Reconciliation Statement
Particulars ₹ ₹
Profit as per Financial Accounts 41,800
Add:
Works Overhead under-recovered in Cost Accounts 1,500

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – JUNE 2025
PAPER – 8 SYLLABUS 2022
COST ACCOUNTING
Expenses and losses debited in Financial Accounts but excluded from
Cost Accounts:
Income Tax Reserve 20,150
Loss on sale of Furniture 600
Loss due to obsolescence 2,850
Goodwill written off 5,000
Selling and Distribution expenses not charged in Cost Accounts 10,000
Donation to Prime Minister’s Relief Fund 5,100
Transfer to Debenture Redemption Fund 9,000
Transfer to Dividend Equalisation Fund 20,500
Under valuation of Opening Stock in Cost Accounts 1,500
Over valuation of Closing Stock in Cost Accounts 2,000 78,200
1,20,000
Less:
Administrative Overheads over-recovered in Cost Accounts 850
Depreciation over-charged in Cost Accounts 650
Incomes and gains credited in Financial books but not shown in Cost
Accounts:
Interest on Investments 3,000
Bank interest and transfer fees 370
Stores adjustments 230
Imputed rent charged in Cost Accounts 1,000
Interest charged in Cost Accounts 2,000 8,100
Profit as per Cost Accounts 1,11,900

4. (a) JANATA TRANSPORT LTD. a Transport Company is running 4 buses between two towns which
are 50 kms. away. Seating capacity of each bus is 40 passengers. The following information is
obtained from its books for November, 2024:
Particulars ₹
Wages of drivers, conductors and cleaners 24,000
Salaries of office and supervisory staff 10,000
Diesel, oil and other lubricants 40,000
Repairs and maintenance 8,000
Taxes, insurance etc. 16,000
Depreciation of buses 26,000
Interest and other charges 20,000
Actual passengers carried were 75% of the seating capacity. All the 4 buses ran on all the days of
the month. Each bus made one to and fro round trip per day.
Prepare the Operating Cost Statement and determine the cost per passenger km. for each bus. [7]

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – JUNE 2025
PAPER – 8 SYLLABUS 2022
COST ACCOUNTING
(b) A contractor, who prepares his accounts on 31st March each year, commenced a Contract No. 220
on 1st July, 2023. The following information is revealed from his costing records on 31st March, 2024:
Particulars (₹)
Materials sent to site 2,51,000
Labour 5,65,600
Foreman's salary 81,300
A machine costing ₹2,60,000 remained in use on site for 146 days. Its working life is estimated at 7
years and final scrap value at ₹ 15,000. A supervisor is paid ₹ 8,000 per month and has devoted one
half of his time on the contract. All other expenses amount to ₹ 1,36,500. Materials at site on 31st
March, 2024 cost ₹ 35,400. The contract price is ₹ 20,00,000. On 31st March, 2024 two-third of the
contract was completed, however, the architect gave certificate only for 50% of the contract price
and ₹ 7,50,000 had so far been paid on account.
st
Prepare Contract Account and state how much profit or loss should be included on 31 March,
2024 in financial accounts. [7]

Answer:

(a) Operating Cost Statement

Particulars Amount in ₹
(A) Fixed Costs or Fixed Charges:
Wages of Drivers, Conductors and Cleaners 24,000
Salary of Office and Supervisory Staff 10,000
Taxes, Insurance etc. 16,000
Interest and other charges 20,000
Depreciation of buses 26,000
Total Fixed Costs 96,000
(B) Variable Costs or Running Charges:
Diesel, Oil and other Lubricants 40,000
Repairs and Maintenance 8,000
Total Variable Costs or Running Charges 48,000
(C) Total Operating Charges or Cost (A + B) 1,44,000
(D) Effective Passenger kms. 3,60,000
(E) Cost per Passenger km. (C/D) 0.40

Note: Depreciation can also be shown as Variable Cost or Running Charges as per study module.
Working Note:
Calculation of Effective Passenger kms.:
kms. in one round trip = 50 x 2 = 100 kms
Passenger kms. = Buses x Trip kms. x Trips x Days x Passengers x Capacity
= 4 x 100 x 1 x30 x 40 x75%
= 3,60,000 Passenger kms.

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – JUNE 2025
PAPER – 8 SYLLABUS 2022
COST ACCOUNTING

(b) Working Notes:

(i) Calculation of Depreciation on Machine:

Cost of Machine ₹ 2,60,000
Less: Scrap Value ₹ 15,000
Cost of Machine to be written off ₹ 2,45,000

Depreciation of 1 Year = ₹ 2,45,000/7 = ₹ 35,000

Depreciation for 146 days = ₹ 35,000 (146/365) = ₹14,000

(ii) Calculation of Cost of Work Uncertified:

Cost of 2/3rd completed work = ₹ 10,49,000
Total Cost of completed Contract = ₹ 10,49,000× 3/2 = ₹ 15,73,500
Part of uncertified work = 2/3 – ½ = 1/6
Therefore, Cost of uncertified work = ₹ 15,73,500× 1/6 = ₹ 2,62,250

(iii) Profit Transferred to Profit and Loss Account:

Notional Profit × 2/3 × 7,50,000/10,00,000 = ₹ 1,06,625

Contract Account
Dr. (for the year ended 31st March, 2024) Cr.
Particulars ₹ Particulars ₹
To Materials 2,51,000 By Materials at site 35,400
To Labour 5,65,600 By Balance c/d (Total Cost) 10,49,000
To Foreman’s Salary 81,300
To Supervisor’s Salary (₹8,000 × 1/2 × 9) 36,000
To Depreciation on Machine 14,000
To other Expenses 1,36,500
10,84,400 10,84,400
To Balance b/d 10,49,000 By Work-in-Progress:
To Notional Profit c/d 2,13,250 Certified ₹ 10,00,000
Uncertified ₹ 2,62,250 12,62,250
12,62,250 12,62,250
To profit & Loss Account 1,06,625 By Notional Profit b/d 2,13,250
To Work-in-Progress A/c (Reserve) 1,06,625
2,13,250 ``

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – JUNE 2025
PAPER – 8 SYLLABUS 2022
COST ACCOUNTING
5. (a) REACON LTD is engaged in process Engineering Industry. During a month 4000 units of input
were introduced in Process B at a cost of ₹ 20,000. The normal loss was estimated at 10% of input.
The process costs were direct materials ₹ 10,425, direct wages ₹ 20,400 and factory overhead 50%
of direct wages. At the end of the month 3200 units were produced and transferred to Process C,
500 units were scrapped and realized @ ₹ 5 per unit. Scrapped units were 50% processed. 300 units
were incomplete and the stage of completion was material 75%, wages and overhead 50%.
(i) Calculate the equivalent production, cost per completed unit, value of work- in-progress and
(ii) Prepare Process B account. [7]

(b) A glass manufacturing company requires you to calculate and Prepare the Master Budget for the
year 2023-24 from the following information:
Annual Sales : Toughened glasses A ₹ 30,00,000
Toughened glasses B ₹ 50,00,000
Direct material cost 60% of sales
Direct wages 20 workers @ ₹ 1,500 p.m.
Factory overheads & indirect labour: Works manager ₹ 5,000 p.m.
Foreman ₹ 4,000 p.m.
Stores and spares 2.50% of sales
Depreciation on machinery ₹ 1,26,000
Light and power ₹ 50,000
Repairs and maintenance ₹ 80,000
Other sundries 10% of direct wages
Administration, selling &distribution expenses ₹ 1,40,000 p.a.
(Present the fixed and variable overheads separately showing item wise breakup) [7]

Answer:

(a)
(i) Statement of Equivalent Production:
Equivalent Production
Input Particulars of output Units Material I Material II Labour &
(Input) (Added) Overhead
% Units % Units % Units
4,000 Fully completed and transferred 3,200 100 3,200 100 3,200 100 3,200
to process C
Normal Wastage 400 --- --- --- --- --- ---
Abnormal Wastage 100 100 100 50 50 50 50
WIP at end 300 100 300 75 225 50 150
4,000 Total 4,000 3,600 3,475 3,400

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – JUNE 2025
PAPER – 8 SYLLABUS 2022
COST ACCOUNTING
Statement of Cost
Elements of Cost Amount Equivalent Unit Cost
(₹) Production (Nos.) (₹)
Material I (Input)( ₹ 20,000–₹ 2,000) 18,000 3,600 5.00
Material II (Added) 10,425 3,475 3.00
Wages 20,400 3,400 6.00
Overheads 10,200 3,400 3.00
Total 59,025 - 17.00

Statement of Evaluation
Elements of Unit Cost Work in Progress Abnormal Loss
Cost (₹) E.P. Cost (₹) E.P. Cost (₹)
Material I 5.00 300 1,500 100 500
Material II 3.00 225 675 50 150
Wages 6.00 150 900 50 300
Overheads 3.00 150 450 50 150
Total 17.00 3,525 1,100

(ii)
Process B Account
Dr. Cr.
Particulars Units ₹ Particulars Units ₹
To Input 4,000 20,000 By Normal Wastage 400 2,000
To Materials Added 10,425 By Abnormal Wastage 100 1,100
To Wages 20,400 By Work-in-Progress 300 3,525
To Overheads 10,200 By Process C (3,200×₹ 17) 3,200 54,400
4,000 61,025 4,000 61,025

(b)
Master Budget for the year 2023-2024
Particulars ₹ ₹ ₹
Sales:
Toughened glasses 30,00,000
Bent Toughened glasses 50,00,000
Total Sales (A) 80,00,000
Less: Cost of Sales:
Direct Material (60% of Sales) 48,00,000
Direct Wages (20 * ` 1,500 * 12) 3,60,000
Prime Cost 51,60,000

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – JUNE 2025
PAPER – 8 SYLLABUS 2022
COST ACCOUNTING
Factory Overheads (Variable)
Store and Spares (2.5% on Sales) 2,00,000
Light and Power 50,000
Repairs and Maintenance 80,000 3,30,000
Fixed: Works Manager’s salary 60,000
Fore men’s Salary 48,000
Depreciation of Machinery 1,26,000
Sundries 36,000 2,70,000
Work Cost (B) 57,60,000
Gross Profit (A-B) 22,40,000
Less: Administration, Selling and Distribution Overheads 1,40,000

Net Profit 21,00,000

6. The standard labour component and the actual labour component engaged in a week for a job are as
under:
Skilled workers Semi-skilled workers Unskilled workers
Standard no. of workers in the gang 32 12 6
Standard wage rate per hour (₹) 3 2 1
Actual no. of workers employed in the 28 18 4
gang during the week
Actual wage rate per hour (₹) 4 3 2
During the 40 hour working week the gang produced 1,800 standard labour hours of work.
Calculate labour variances. [14]

Answer:

Analysis of the Given data

Workers Standard Actuals
Skilled 32 × 40 = 1,280 hours @ ₹ 3 per hour 28 × 40 = 1,120 hours @ ₹ 4 per hour
Semi-Skilled 12 × 40 = 480 hours @ ₹ 2 per hour 18 × 40 = 720 hours @ ₹ 3 per hour
Unskilled 6 × 40 = 240 hours @ ₹ 1 per hour 4 × 40 = 160 hours @ ₹ 2 per hour
Input 2,000 hours 2,000 hours
Output 2,000 hours 1,800 hours

SH - Standard Labour Hours for Actual output

Skilled = 1,280/2,000*1,800 = 1,152 hours
Semi-Skilled = 480/2,000*1,800 = 432 hours
Unskilled = 240/2,000*1,800 = 216 hours

SR - Standard Rate per hour

Skilled = ₹ 3 per hour Semi-Skilled = ₹ 2 per hour Unskilled = ₹ 1 per hour

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – JUNE 2025
PAPER – 8 SYLLABUS 2022
COST ACCOUNTING

AH - Actual Hours Paid

Skilled = 1,120 hours Semi-Skilled = 720 hours Unskilled = 160 hours

AR - Actual Rate
Skilled = ₹ 4 per hour Semi-Skilled = ₹ 3 per hour Unskilled = ₹ 2 per hour

RSH - Revised Standard Hours for Actual Input

Skilled = 1,280/2,000*2,000 = 1,280hours
Semi-Skilled = 480/2,000*2,000 = 480 hours
Unskilled = 240/2,000*2,000 = 240 hours

i. Labour Cost Variance = SH ×SR – AH ×AR

Skilled = (1,152 ×3) – (1,120 ×4) = ₹ 1,024 (A)
Semi-Skilled = (432 ×2) – (720 ×3) =₹ 1,296 (A)
Unskilled = (216 ×1) – (160 ×2) = ₹ 104 (A)
₹ 2,424 (A)
ii. Labour Rate Variance = (SR – AR) × AH
Skilled = (3 – 4) × 1,120 = ₹ 1,120 (A)
Semi-Skilled = (2 – 3) × 720 = ₹ 720 (A)
Unskilled = (1 – 2) × 160 = ₹ 160 (A)
= ₹ 2,000 (A)

iii. Labour Efficiency Variance = (SH – AH) × SR

Skilled = (1,152 – 1,120) × 3 = ₹ 96 (F)
Semi – Skilled = (432 – 720) × 2 = ₹ 576 (A)
Unskilled = (216 – 160) × 1 = ₹ 56 (F)
= ₹ 424 (A)

iv. Labour Mix Variance = (RSH – AH) × SR

Skilled = (1,280 – 1,120) × 3 = ₹ 480 (F)
Semi-Skilled = (480 – 720) × 2 = ₹ 480 (A)
Unskilled = (240 – 160) × 1 = ₹ 80 (F)
= ₹ 80 (F)

v. Labour Yield Variance = (SH – RSH) × SR

Skilled = (1,152 – 1,280) × 3 = ₹ 384 (A)
Semi-Skilled = (432 – 480) × 2 = ₹ 96 (A)
Unskilled = (216 – 240) × 1 = ₹ 24 (A)
= ₹ 504 (A)

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – JUNE 2025
PAPER – 8 SYLLABUS 2022
COST ACCOUNTING
7. (a) Two businesses AB Ltd and CD Ltd sell the same type of product in the same market. Their
budgeted profits and loss accounts for the year ending 30th June, 2024 are as follows:
Amount (₹)
AB Ltd CD Ltd
Sales 1,50,000 1,50,000
Less: Variable costs 1,20,000 1,00,000
Fixed Cost 15,000 1,35,000 35,000 1,35,000
Profit 15,000 15,000
Calculate the BEP of each business and Compare which business is likely to earn greater profits
in the following conditions:
(i) Heavy demand for the product
(ii) Low demand for the product [7]
(b) Describe classification of costs determined under CAS-1. [7]
Answer:
(a) Statement showing computation of P/V Ratio, BEP and determination of Profitability in different
conditions:
Particulars AB Ltd (₹) CD Ltd (₹)
Sales 1,50,000 1,50,000
Less: Variable Cost 1,20,000 1,00,000
Contribution 30,000 50,000
Less: Fixed Cost 15,000 35,000
P/V Ratio = Contribution/Sale×100 30,000/1,50,000×100 = 20% 50,000/1,50,000×100=33 ½%
BE Sales = Fixed Cost ÷ P/V Ratio =15,000÷20% = ₹75,000 35,000÷ 33½% = ₹1,05,000
(i) When there is heavy demand for the product – Product produced by CD Ltd is profitable because
the P/V Ratio is higher than AB Ltd.
(ii) When there is low demand for the product – Product produced by AB Ltd is profitable because
fixed cost is less than CD Ltd. This is also revealed from the break even sales. The break even
sales for AB Ltd is less than CD Ltd because the fixed cost of AB Ltd is less in comparison to CD
Ltd.
(b) As per Cost Accounting Standard 1 (CAS-1), the basis for cost classification is as follows:
I. Nature of expense - Costs should be gathered together in their natural grouping such as Material,
Labour and Other Direct expenses. Items of costs differ on the basis of their nature.
The elements of cost can be classified in the following three categories. 1. Material 2. Labour 3.
Expenses
II. Relation to Object – Traceability - If expenditure can be allocated to a cost centre or cost object
in an economically feasible way then it is called direct otherwise the cost component will be
termed as indirect. According to this criterion for classification, material cost is divided into direct
material cost and indirect material cost, Labour cost is divided into direct labour and indirect
labour cost and expenses into direct expenses and indirect expenses. Indirect cost is also known
as overhead.

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – JUNE 2025
PAPER – 8 SYLLABUS 2022
COST ACCOUNTING
III. Functions/Activities - A business enterprise performs a number of functions like manufacturing,
selling, research...etc. Costs may be required to be determined for each of these functions and on
this basis functional costs may be classified into the following types: - (1) Production or
Manufacturing Costs (2) Administration Costs (3) Selling & Distribution cost (4) Research &
Development costs.
IV. Behaviour - Costs are classified based on behaviour as fixed cost, variable cost and semivariable
cost depending upon response to the changes in the activity levels.
V. Management decision making - Ascertainment of cost is essential for making managerial
decisions. On this basis costing may be classified into the following types. Some Examples are
Marginal Costing, Differential Cost, Opportunity Cost, Replacement Cost, Relevant Costs,
Imputed Costs, Sunk Costs etc.
VI. Production Process - Batch Costing, Process Costing, Operation Cost, Operating Cost, Contract
Costing etc.
VII. Time Period Details can be discussed as below: A cost item is related to a specific period of time
and cost can be classified according to the system of assessment and specific purpose like ,
Historical Costs, Predetermined Costs, Standard Costs, Estimated Costs.
Techniques of Costing—
A. Marginal Costing
B. Standard Costing
C. Budgetary Control
D. Uniform Costing

8. (a) Explain the concept of Opportunity Cost and Imputed Cost with suitable examples. [4]
(b) Discuss the requisites of Material Control System. [5]
(c) Describe how overtime is treated in cost records as per CAS-7? [5]

Answer:

(a) Opportunity Cost: Opportunity cost is the value of alternatives foregone by adopting a particular
strategy or employing resources in specific manner. It is the return expected from an investment other
than the present one. These refer to costs which result from the use or application of material, labour or
other facilities in a particular manner which has been foregone due to not using the facilities in the
manner originally planned. Resources (or input) like men, materials, plant and machinery, finance etc.,
when utilized in one particular way, yield a particular return (or output). If the same input is utilized in
another way, yielding the same or a different return, the original return on the forsaken alternative that
is no longer obtainable is the opportunity cost. For example, if fixed deposits in the bank, are proposed
to be withdrawn for financing project, the opportunity cost would be the loss of interest on the deposits.
Similarly, when a building leased out on rent to a party is got vacated for own purpose or a vacant space
is not leased out but used internally, say, for expansion of the production programme, the rent so
foregone is the opportunity cost.
Imputed Cost: Imputed cost is hypothetical or notional cost, not involving cash outlay and computed
only for the purpose of decision-making. In this respect, imputed cost is similar to opportunity cost.

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – JUNE 2025
PAPER – 8 SYLLABUS 2022
COST ACCOUNTING
Interest on funds generated internally, payment for which is not actually made is an example of imputed
cost. When alternative capital investment projects are being considered out of which one or more are to
be financed from internal funds, it is necessary to take into account the imputed interest on own funds
before a decision is arrived.

(b) Requisites of Material Control System:

(a) Coordination and cooperation between the various departments concerned viz. purchase,
receiving, inspection, storage, issues and Accounts and Cost departments
(b) Use of standard forms and documents in all the stages of control
(c) Classification, coordination, standardization and simplification of materials
(d) Planning of requirement of material
(e) Efficient purchase organization
(f) Budgetary control of purchases
(g) Planned storage of materials, physical control as well as efficient book control through
satisfactory storage control procedures, forms and documents
(h) Appropriate records to control issues and utilization of stores in production
(i) Efficient system of Internal Audit and Internal Checks
(j) System of reporting to management regarding material purchase, storage and utilization.

(c) Treatment of overtime in Cost Records: As per CAS-7, Overtime Premium shall be assigned directly
to the cost object or treated as overheads depending on the economic feasibility and specific
circumstances requiring such overtime.
When overtime is worked due to exigencies or urgencies of the work, the basic/normal payment is
treated as Direct Labour Cost and charged to Production or cost unit on which the worker is employed.
Whereas the amount of premium (extra amount) is treated as overhead.
If overtime is spent at the request of the customer, then the entire amount (including over time premium)
is treated as direct wages and should be charged to the job.
When the overtime is worked due to lack of capacity as general policy of the company then the total
amount paid is treated as direct wages which is computed at the estimated rate based on the figures of
the previous years.
Overtime worked on account of the abnormal conditions such as flood, earthquake, etc., should not be
charged to cost, but to Costing Profit and Loss Account if integrated accounts are maintained.
It will thus be seen that overtime involves payment of increased wages and should be resorted to only
when extremely essential.

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Directorate of Studies, The Institute of Cost Accountants of India