B I M (TU) - ML Hada

Chapter 1: Costs and its Behavior

As the level of business activities changes, some costs change while others do not. The response of a cost to a change in business activity is known as cost behavior. Managers should be able to predict the behavior of a particular cost in response to a change in particular business activity. For this purpose, costs are classified in three parts as follows.

Variable Costs

Fixed Costs

Semi Variable Costs or Mixed Costs

Variable Costs:

A cost that remains Constant (per unit) in any level of activity is called Variable Cost. But it changes proportionately, in total Rupees amount, with the change in the level of activity. A common example of variable cost is direct materials cost, direct labor cost etc. Following is the example to understand Nature of Variable Cost

Suppose a mobile phone manufacturing company purchase speakers from another company at a cost of Rs1500 per speaker. The speaker is a direct materials cost for mobile phone manufacturing company. One speaker is used to complete one mobile phone. Here total cost of speakers increase as the mobile phones produced (level of activity) are increased but per unit cost remains constant. Other examples of variable cost include Direct Labor Cost, lubricants, sales commission etc

Fixed Costs:

A cost that does not change, in total Rupees amount, with the change in level of activity is called Fixed Cost. But it changes in Per Unit

A Common example of Fixed Cost is Rent. In the above example, if the mobile phone manufacturing Company rents a Building for its Factory for Rs 500,000 per month, it will have to pay a Fix amount of Rs 500,000 every month no matter the company produce 5000 or 10000 pieces of mobile phone or even no phone is produced during a month. There is an Inverse relationship between per unit Fixed Cost and Level of Activity. If production increases, per unit fixed cost decreases and if production decreases, per unit fixed cost increases.

Semi Variable Costs or Mixed Costs:

A Cost that has the characteristics of both variable and fixed cost is called semi-variable costs

For example, a fixed rental charge of a machine (taken on Hire) might include Rs 5000 per month basic plus Rs 200 per hour of use. Here Rs 5000 per month is a Fixed Cost and Rs 200 per hour is a variable cost

Another example of mixed cost is Electricity Bill. The electricity bill can be divided into two parts, i.e. (a) Line Rental charge (b) Cost of per unit Consumed. The line Rental charge is not affected by the Consumption of Electricity whereas the cost of units consumed varies with the change in units consumed

Another example of mixed cost is “Cost of Operating an automobile” i.e. Transport service business. Operating License, Insurance cost of Vehicles, Parking charge do not change with the numbers of mile/km driven, so these parts of cost are fixed. But the cost of petrol/diesel etc increase with per km driven.

Segregation of Semi Variable Costs or Mixed Costs

For decision making purpose, semi variable costs are divided into Fixed cost and Variable cost. The process of dividing is called "Segregation of Semi variable cost or mixed costs" There are two method to segregate the semi variable costs, which are as below.

High Low Method

Least Square Method

High Low Method

High Low method is an arithmetical method of segregation of mixed costs. Following are the steps and formulae applying in the method.

(i) Find out variable cost per unit (b)

High cost - Low cost

vcpu (b) = ----------------------------------

High LA - Low LA

(Here LA = level of activity, production unit/output)

(ii) Find out fixed cost (a)

fixed cost (a) = Y - b x LA (Here, Y = Total Cost)

Least Square Method

Least square method is a statistical method for segregation of mixed costs. Following are the steps and formulae applying in the method.

Chapter 2: Accounting for Materials

Accounting for materials study about how an organization could minimize the costs (expenses) relating to the inventory or materials. For the purpose, company use different tools and techniques by which it shall be possible to answer the following questions that shall minimize cost relating to inventory management.

1. How much quantity should be ordered at a time? (Economic Order Quantity)

2. How much shall be the costs if company follow EOQ process? (Total Cost of EOQ)

3. How many times in a year order shall have to be placed? (No of orders in a year)

4. How much shall be the gap between two consecutive orders? (Time gap between two orders)

5. How much shall be the minimum inventory level? (Safety stock)

6. How much should the maximum level of inventory? (Max Stock Level) and many more....

Following are different formulae to answer the above questions.

1. Economic Order Quantity: EOQ is an optimum ordering quantity which keeps the total cost of inventory management minimum. There are two kinds of cost associated with inventory management. They are as follows.

(i) Ordering Cost

(ii) Carrying Cost or Storing Cost or Handling Cost

Following are some of the major formulae related to inventory management

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Chapter 3: Accounting for Labor

Labors are one of the important factors of production. Labors help the company to convert raw materials into finished goods. Company pays remuneration to the labors which is called wages. Under Accounting for labor we learn about methods of wage payment to labors.

Basically there are two methods of wage payment

Time Wage System: wages are paid in the basis of per Hour (Time). It is also called hourly wage system

Piece Wage System: wages are paid on the basis of per unit of production (output)

1. Time Wage System

Under time wage system, wages is calculated using the following three different methods (formulae) according to the need of the situation.

(i) Straight Time Wage Method: Under this method, wages is calculated multiplying the hour worked by the labor and wage rate per hour. Following is the formula.

Total Wage (TW) = Hour worked x wage rate per hour

(ii) Halsey Premium Plan: Under this system, labors are paid basic wage according to the hour worked by them and wage rate per hour like straight time wage system. In addition, labors are also paid additional amount as incentive (bonus) if the labor complete the job in less amount of time than the given time, i.e. time saved In other words, labors are paid additional amount as incentive on the basis of their performance. Following is the formula.

ST - TT

Total wage under Halsey Premium Plan (TWh) - TT x TR + ---------- X TR

( Here, TT = Time Taken or Actual Time

TR = Time Rate or Hourly Rate

ST = Standard Time or Time allowed

Also ST - TT = TS, i.e. Time Saved

TW (H)

Effective Wage Rate (ER) = ------------

T T

(iii) Rowan Premium Plan: It is also like calculation of total wage under Halsey Premium Plan. Under this method also, labors are paid basic wage according to the hour worked by them and wage rate per hour like straight time wage system. In addition, labors are also paid additional amount as incentive (bonus) if the labor compete the job in less amount of time than the given time, i.e. time saved. In other words, labors are paid additional amount as incentive on the basis of their performance. The only difference between Halsey Premium Plan and Rowan Premium plan is the criteria of calculation of bonus, rest other are same in both Halsey premium plan and Rowan premium plan. Following is the formula.

ST - TT

Total wage under Rowan Premium Plan (TWr) = TT x TR + --------------- x TT x TR

TW (R)

Effective Wage Rate (ER) = -----------

T T

2. Piece Wage System

Under piece wage system, wages is calculated on the basis of units of output produced multiplied by wage rate per unit. Like Time wage system, there are also different formulae for calculation of total wage under piece wage system. They are as follows.

(i) Straight Piece wage = unit of output produced x wage rate per unit

(ii) Taylor's differential piece wage system: Taylor differential piece rate is a piece wage system of wage payment. Under this system, wages are paid to the worker on the basis of unit of output produced by them. For calculation of total wages, the firm sets a standard output to be produced by worker. Suppose a firm sets a standard that labor should produce 50 units per day working 8 hours each day. Then 50 units is the standard output. This system says that the labor who produced output equal to the standard or more than the standard (in our example 50 units or more), then the worker should be paid at high piece rate. And the worker who produce less than the standard output (in our example less than 50 unit) should be paid at low piece rate. There are two rates (High piece rate and low piece rate) for calculation of total wages depending upon the output produced by the labor.

What is High piece rate and Low Piece rate?

High piece rate is 20% plus piece rate and Low piece rate is 20% minus piece rate. For example, if standard piece rate is Rs60 per unit, then High piece rate shall be Rs 60 + 20% of Rs 60,i.e. Rs 12 = Rs 72. Low piece rate shall be Rs 60 - 20% of Rs 60,i.e. Rs 12 = Rs 48.

Following are formulae to calculate Total wage under Taylor Differential piece rate system.

TW (at or above standard) = Actual Output X High Piece Rate

TW (below standard) = Actual Output x Low Piece Rate

(iii) Gantt's Task and Bonus Plan: Under Taylor differential piece rate system, the worker who produce output below the standard are paid at Low piece rate. But under Gantt's task and bonus plan, worker who produce output below standard are paid at normal piece rate or normal time rate. In other word, a minimum wage is guaranteed to the labor. So this is democratic approach of calculation of total wage of workers.

Following are formulae to calculate total wage under Gantt's task and bonus plan.

TW (above standard) = Actual Output X High Piece Rate

TW (at standard) = Actual Output X High Piece Rate

TW (at standard) = (TT X TR) x 20%

TW (below standard) = Standard Output X Normal Piece Rate

TW (below standard) = Standard Time X Standard Time Rate

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Labor_Sol_Download here....

Chapter 4: Accounting for Overheads

When a manufacturing company manufactures a product, it attracts different kinds of expenses, which is called “Costs” There are generally 3 kinds costs as mentioned below

1. Direct Materials

2. Direct Labor or Direct Wages

3. Indirect Expenses or Overheads

Direct Material and Direct Labor/Wages are also called “Prime Costs” and indirect costs are called "Overheads"

Direct Costs (Prime Cost) are identifiable Product Wise easily, but Indirect Costs (Overheads) are not identifiable product wise easily. Let us take one example. Suppose a factory produce Furniture like table and chair. Suppose, a chair requires 2 square feet of wood and cost for 1 square feet of wood is Rs 1500. Then Cost of materials (i.e. wood) is Rs 3000 for one chair. So cost of materials is Rs 3000 which is easily identifiable. Similarly suppose the factory pays Rs 2000 to carpenter for one chair. Then cost of labor or wages becomes Rs 2000 for one chair. So cost of labor or wages for one chair is Rs 2000 which is easily identifiable for one chair. In this example cost of material and labor comes as mentioned below

Cost of material per chair (wood) Rs 3000
Cost of labor per chair (carpenter wages) Rs 2000

Total Prime Cost for 1 Chair Rs 5000

Apart from cost of material and cost of labor, some other miscellaneous expenses are also incurred. For example, electricity expenses, material handling expenses, power expenses etc. These costs are not easily identifiable per unit of chair. Let us say, total cost of electricity in a certain month comes Rs 14500. It is the total cost for all the chairs, all the tables manufactured during the period.

It is not easy to ascertain how much expense of electricity has come for one chair. Such costs are for all the chairs and tables together. Such costs are called joint costs, overall costs, mixed costs or the “overheads”

Therefore such costs are required to find out how much cost of electricity should be charged for one chair. The process of determining costs of overheads for 1 chair or for 1 table is called "apportionment of overheads"

Apportionment of Overheads

As it is mentioned above, the overheads are a joint cost incurred together for all the products. So overheads are required to determine "how much for one unit of chair or one unit of table". The process of doing so is called "Apportionment of Overheads" There are certain basis which are considered to apportion the "overheads costs" product wise which are mentioned as below.

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Chapter 5: Variable Cost Income Statement & Absorption Cost Income Statement

Income Statement Format download here....

Solution Q No 1 (P no 140) download here

Sol to Q No 4 & 10 download here

Sol to Q No 18 download here

Chapter 6: Cost Volume Profit Analysis (CVP Analysis)

Class Work Solution Learn from here download....

Chapter 7: Master Budget

Budget is an estimation or planning for future expenses and revenue. Companies prepare Budgets generally for a period of 3 months of time. Master budget is a set of budgets that are prepared by both Trading Companies and Manufacturing companies

Master Budget for a Trading Company: A trading company do not buy raw materials. It buys finished goods and sales finished goods. Finished goods are called merchandise. Following are the sets of budget prepared by trading company and manufacturing company.

Budgets of Trading Company

Sales Budget

Merchandise (Finished Goods) Purchase Budget

Cash Receipt and Disbursement Budget

Apart from the above main budgets, trading company also prepares different expenditures budgets according to the need as follows

* Office & Administrative Expense Budget

* Selling & Distribution Expense Budget

Budgets for Manufacturing Company

Sales Budget

Production Budget

Raw Materials Consumption/Use/Need/Requirement Budget

Raw Materials Purchase Budget

Cash Receipts & Disbursement Budget

Apart from the above main budgets, manufacturing company also prepare different expenditures budgets according to need as follows

* Labor Cost Budget or Wages Budget

* Office & Administrative Budget

* Selling & Distribution Budget

In budgets of both trading and manufacturing companies, Cash Budget is the main budget. The specimen of the Cash Budget is attached hereunder.

Specimen of Cash Budget

Exercise Solutions

Exercise Sol 2079.10.23

Exercise Sol 2079.10.24

Exercise Sol 2079.10.25

Exercise Sol 2079.11.07 (No 30 & 31)

TU Exam 2022 MB

Complete Sol (TU Exam 2022 MB) and 2019 (2079.11.12)

Sol MB Exam Ques 2016 (2079.11.15)

MB 2016 with correction 2079.11.18

Chapter 8: Flexible Budget

This chapter contains two kinds of numerical problems

1. Flexible Budget for a given levels of activity

2. Overhead Variance Analysis

1. Flexible Budget: While preparing flexible budget, two kinds of costs are considered, i.e.

(a) Fixed Costs: It is constant in total at all level of activity

(b) Variable Costs: It is constant in per unit

The practical questions are very similar to the first chapter “Cost and its Behavior or Classification”

2. Overhead Variance Analysis: Under this section, 3 kinds of variances are determined (Spending Variance, Efficiency Variance, Capacity Variance). Therefore it is also called "Overhead Three Variance"

Solutions of few typical numerical questions are attached hereunder.

Flexible budget exercise/exam ques solution